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The secret to great credit management

Erica Sandberg

June 2, 2015

QHi Erica,

I have been using my bank card for everything. I have one Wells Fargo credit card, which I have had since October 2006 and one Gap credit card since May 2010. No balance on either. My car is paid. I save a little money here and there. I have my TransUnion credit report, and it looks OK. It even shows one Chase credit card that I had in college and closed in 2008. My credit score that I got for free with my report is 601. Why is it so bad? Did I do something wrong? I am a very frugal and responsible mom of two boys, and I have a job.  –Jean Marie

ADear Jean Marie,

I have little doubt that you are an excellent money and credit manager! From what you described, it does seem that you're spending your income wisely and have kept your credit accounts in fine standing.

In fact, that Chase credit card would not even be listed on your consumer credit reports if you did mismanage it. The Fair Credit Reporting Act stipulates that negative line items such as evidence of late payments and defaults cannot be listed on the reports after seven years have lapsed. However, accounts that you've treated well can remain on the reports for 10 years from the date you last used it.

That said, I understand your confusion about why your FICO score isn't higher. You've done everything right, correct? Ask Erica

Yes and no. Consider the following analogy:

Let's say you need to hire a driver to transport your kids to their soccer games. Before hiring, you'd check the person's reputation. How she's been driving, especially lately, will be paramount to your decision. If you discovered many speeding tickets that she has received within the past few months, you'd be right to conclude that she has a dangerous lead foot. That would put her on the no-hire list. However, if the violation happened once, many years ago, you probably wouldn't have the same concerns. She would need to have proof of recent experience behind the wheel, though, since anyone can keep a record free of blemishes by not driving at all.

Now, apply the scenario to your credit rating. Clearly, the way you've borrowed money and paid it back is extremely important to a lender, with the past couple of years being particularly crucial. Yes, you've lived within your means, and that's fantastic for your financial security, but that prowess isn't apparent to those checking your credit reports. That's because your balanced budget, savings account funds and earnings aren't recorded on them. Credit reports only show credit and debt activity. Without it, credit scoring companies don't have enough fresh information to plug into their mathematical model. Your scores, then, are a little malnourished. They need healthy food!

Thankfully, the remedy is simple. Just pick up one or both of the active cards you already have and charge some affordable items or services at least once a month. When the bill comes in, pay the entire balance before the due date on your statement. The creditors will finally have activity to send to the credit reporting agencies, and the credit scorings companies will have up-to-date information to calculate. Follow this easy strategy and not only will your scores steadily rise, but you'll never pay a penny in financing fees.

Another tip: After your credit score has hit the mid-700 mark, you'll have what's considered excellent credit. At that point, your options for amazing rewards cards will open up, so consider adding one to your wallet. A word of caution: Only choose a card that you know you qualify for, and don't apply for multiple cards at once — that can drive down your score.

As someone who obviously knows how to meet her expenses and steer clear of debt, you can use your new card  to accumulate points transferable for cash, travel and products. Why not profit from the process of paying on time and in full each month?!

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