With the economic turmoil, maintaining a high Fico score is more important than ever. Just about everyone understands if you pay your bills late or skip a payment all together, your credit score is going to be lower than someone’s who always pays everything before it’s due. We also understand that a lower utilization of our available credit will increase our Fico Score.

There are some other financial mistakes that may not be as well known, but that will also cause a lower credit score. When talking about your financial situation, what you don’t know really can hurt you here are some financial mistakes you need to avoid:

1. Shopping Around for Better Rates: How can making sure you get the best interest rate possible on your financing be wrong? In theory if you are shopping for a specific loan, lets say a car loan or a house loan, the inquiries during a 15 day period are not supposed to affect your score. The problem is that most creditors will not code the inquiries correctly. While one creditor might state the inquiry was for a mortgage, another creditor might code the inquiry as miscellaneous, thus the inquiries will not appear to be for the same type of loan and your credit score will take a hit.

The Fico credit scoring model uses the number of inquiries when calculating your credit score. Statistically, people who have a lot of inquiries are more of a credit risk than someone with less inquiries. To creditors it would appear that you are desperate to obtain credit and will refuse extending credit if you have an excessive amount of inquiries.

2. Equity Loans vs Equity Lines of Credit?: Lines of credit are convenient, a lender grants you a credit line based on the available equity of your home and using the home as collateral. You use this line as needed by writing a convenient check or using a debit card. So far so good right? Wrong!!! Equity lines of credit are considered revolving credit lines and just like credit cards, the fico scoring system will penalize you if you use over 30 percent of the Equity credit line. So if you have a line of credit in the amount of $50.000 and you decide to use $40,000 to add a nice in ground pool. You have just charged 80 percent of your available credit line and your score will drop.

Equity loans on the other hand do not have this negative effect, equity loans are considered installment loans and they are not scored the same way as the revolving accounts. Installment loans increase the score, but closer to pay off will you notice the difference. It is a good thing to mix in installment loans.

3. Closing Credit Card Accounts: Often times we close credit cards accounts, not thinking about the negative impact that closing a credit card account can have on your Fico credit score. Closing credit card accounts will often lower your credit score! Credit score calculation takes into consideration how much of your revolving credit limit you are using. If you have a credit card with a $5,000 limit and you are using $2,500 you are using 50% of your available credit. The amount of your available credit that you use is almost as important in the calculation of your credit score as making your payments on time. Not only a open account will help you with the utilization, the fico scoring system also takes into account the average age of your accounts.

If you close your oldest trade line then the average age of your accounts will be reduced, lowering your fico score. Essentially they award more points to people that have had credit and used it responsibly for a longer period of time. As a rule of thumb, you should never owe more than 3o percent of your total credit line on any one credit card. So if you have a card with a $1000.00 credit limit, try not to charge over $300 dollars.
4. What to do with Cards that are Paid Off?: So if you’re not supposed to close credit card accounts, you should just leave the credit cards alone until they disappear off your credit report seven years after your last date of activity, right? Wrong! If after you pay off your credit card you leave the account open to avoid increasing your debt utilization percentage, the clock starts ticking. Most unused credit information will be removed from your credit report after 7 years. If your credit card shows a history of on time payments, you don’t want it to be removed from your credit report!

Use your credit card once every couple of months to pay for dinner or an item that you will pay off in full as soon as the bill arrives. By making a purchase periodically, the account will not be closed, your creditor will continue to report the activity and help you keep your credit score strong. The Fico scoring model wants you to use your credit cards, and while some people erroneously think that they should have great credit because they never use their credit cards, the opposite is true. As long as you are using your cards responsibly and never charge over 30 percent of your credit cards, you should have a healthy solid Fico score.

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Tags: fico, fico tips, high credit score tips, high fico score, my fico

This entry was posted on Saturday, March 14th, 2009 at 11:24 am and is filed under MyFico Credit Score. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.