FWF has long been flooded with questions about how to increase credit scores. The purpose of this thread is to offer a central location for general explanations and guidelines about credit scores, how to improve them, and how to keep them high. Along the lines of the LARGE credit lines thread, I will try to keep this post restricted to more or less verified factual info, and add my own more subjective suggestions/strategies in the post following this OP.
This is a draft, and needs further revision. Please treat the thread as such for the time being. Please also add your comments and suggestions, and I will do my best to keep the OP current. I would also appreciate links to the best CURRENT sources which confirm (or refute!) points made in this thread, for inclusion in the OP. Thank you!!
EDIT: PLEASE AVOID SENDING PMS OR EMAILS ABOUT "WHAT IS THE BEST PLAN OF ACTION FOR ME". I (and perhaps others?) have received many of these since this thread was posted. Even if I could answer those questions for you--and without knowing the DETAILS of your situation, I really couldn't--I simply don't have the time to provide detailed counseling for free. On the other hand, I will happily try to address, brief, questions that might be applicable to many other FW members. Thanks for understanding!
This post quickly grew so long that I decided to divide it into sections. I'm very open to suggestions on how to make the structure clearer or less cumbersome. While it may be overkill, I'm hoping a TOC will help:
TABLE OF CONTENTS
I. WHY SHOULD I CARE ABOUT MY CREDIT SCORE?
A. The Importance of "Adequate" Credit Scores
B. "Adequate" vs. "Super" Credit Scores
C. Why would a "Super" credit score be helpful?
II. GENERAL FEATURES OF CREDIT SCORING
A. Credit scoring models are intentionally ambiguous
B. Scoring model complexity prevents extrapolation
C. Scoring Depends on Reporting--which can vary considerably.
D. Scoring models and their key "inputs" are evolving significantly.
E. Scoring seems headed towards consolidation.
F. Scoring is always individual, not "joint".
III. RULES FOR KEEPING CREDIT SCORES HIGH
A. Do not EVER pay late.
B. Keep your apparent credit "utilization" low.
C. Seek higher credit limits.
D. Keep your "credit quality" high.
E. Cultivate a long credit history and an old average account age.
F. Avoid excessive "hard inquiries".
G. Avoid frequently changing your "official residence".
IV. TIME-TESTED TACTICS FOR FOLLOWING THE RULES
A. Establish credit early.
B. Be choosy about the quality of your credit applications.
C. Use "authorized user" status strategically.
D. DO NOT CLOSE ANY CC UNLESS YOU HAVE A SPECIFIC REASON
E. Time credit applications strategically.
F. Think through your "official" address.
V. MONITORING YOUR CREDIT
A. Why Bother?
B. Getting FICO, FAKO, Vantage, and other "scores"
C. Getting Access to your Report and Score
VI: RELATED ISSUES AND LINKS
Appendix: A Credit Glossary
___________________________________________
SECTION ONE: WHY SHOULD I CARE ABOUT MY CREDIT SCORE?
A. The Importance of "Adequate" Credit Scores
Clearly, having an acceptably high credit score is more important in recent years than at any time since scoring models were developed. If your score is not sufficient, you will:
-pay more to get mortgages, car loans, and other credit;
-be less likely to get offered a job;
-be unable to get many brokerage or bank accounts;
-pay more, perhaps much more, for insurance;
and those are just the effects that are widely documented. Because the increasing use of credit scores by various agencies is controversial, we often don't hear about their use.
B. "Adequate" vs. "Super" Credit Scores
A grading analogy might help demystify the importance of credit scoring. For most people, a credit score is more like a "high pass / pass / fail" grade than a letter grade. If you score a "high pass"--roughly, between a 680 and a 720, depending on the model--then that's "Adequate" for all practical purposes. Further improvements simply aren't important, and won't benefit you. Moreover, the higher into the 700 range one gets, the more difficult it is to raise them still further. The bottom line is that in the vast majority of cases, once one's true scores are well into the 700s, it simply isn't worth worrying about them anymore. The key is keeping a "high pass" or "Adequate" score.
C. Why would a "Super" credit score be helpful?
I can think of three reasons. First, super scorers sometimes receive the tastiest "by invitation" pre-approvals for new credit. Capital One has been especially aggressive about this, sometimes offering superb terms and huge lines to >760 credit scorers. Second, a very few lenders save their best rates for super scorers. Farm Bureau Bank, for example, will give a no-fee prime + 0 business LOC to super scorers (generally 760 or better) Finally, it's nice to have a "margin for error." For example, my credit profile is WAY too active to keep a score much above 750 on any sustained basis. But it's very important to me that it's always at least "adquate", as I earn several thousand a month from my credit lines and would suffer real losses if some snafu shipped me into "sub-prime" status. So, I like to shoot for the 740-760 range, so that I know that the minor issues (wrongly reported lines, unexpected inquiries, etc.) won't drop me below 700.
SECTION TWO: GENERAL FEATURES OF CREDIT SCORING
A. Credit scoring models are intentionally ambiguous.
The three major credit reporting companies / agencies (CRC or CRAs) are Equifax, Experian and TransUnion. They are private, for profit entities. They all maintain the position that their scoring models are "trade secrets," and they fight tooth and nail to reveal as little as possible about their details. Moreover, they are regularly tweaked, in ways that are not publicized. This is one reason why there can be no reliable answer to precisely how much a certain factor would affect a given person's credit score. This also explains why there is so much misinformation floating around on credit scoring, even from journalists and others who should know better.
B. Scoring model complexity prevents extrapolation.
Theoretically, two identical credit profiles, when faced with the same pertinent change (a new line, late payment, whatever) should have their scores change in the same way. But in practice, no two credit profiles are ever alike. There are simply too many relevant factors. The age of each credit line, its type, its payment history, its size, the degree to which it's used, and many other factors are get put into the "black box" of credit scoring. When all these factors are considered no two people are really alike. That's why you should be suspicious of anyone claiming that "doing x will increase (or decrease) YOUR score by y points." There is NO WAY that they or ANYONE else could know that information.
C. Scoring Depends on Reporting--which can vary considerably.
First, if a credit grantor doesn't report the use of the credit, then it isn't considered in your score. Most business credit lines don't report to one's personal credit at all--which is why business lines can be a great way to "hide" use of credit. Most personal cards do report the limit, the balance (generally as of the close of the last billing cycle), and the minimum payment due (at that cycle close). A few do not. Capital One is probably the most prominent exception, reporting the "high balance" instead of the limit to the CRCs. Counter to popular belief, such exceptions are rather easily worked around, provided one knows they are there. (Note: Cap1 in particular is almost always willing to offer no fee balance transfers, and they will sometimes even offer "purchase checks" that allow you do deposit your CL into a bank account. Simply pay the balance off before the cycle closes, and your new "highest use" will be your credit limit, while your balance (which is measured as of the close) may be as low as zero.)
D. Scoring models and their key "inputs" are evolving significantly.
The ambiguity of scoring models and the changes in reporting mechanics complicates the tracking of changes in CRC scoring models. Even so, anecdotal evidence and occasional industry comments confirm that major changes have occurred over the past few years. Here are a few worth noting:
-Inquires are often sent to the CRCs much more quickly than previously. Years ago, it wasn't uncommon for all 5 inquiries made on a Monday to not show on one's report until Tuesday or later. Now, most of them will show up almost instantly. Needless to say, this has implications for credit application strategies. In particular, huge "App-o-Ramas" don't hold quite the attraction they once did.
-Secured revolving lines are more accurately reported AND less damaging than they once were. Along with the HELOC boom of the early 2000s came many consumers whose credit was badly hurt by their >50% utilization on their equity lines. Gradually, equity creditors began to more precisely specify their lines as "secured revolving," "heloc", and the like, rather than the simpler "revolving" that all CCs are coded. Also, CRCs began treating them differently, recognizing that high use of a HELOC (at the prime rate or thereabouts, and secured by real assets) was a much lesser risk factor for creditors than similar balances on credit cards.
-Multiple loan inquiries within short time frames are more often bundled. Not long ago, "rate shopping" for a mortgage or a car could really hammer one's score, since every inquiry by each lender one spoke with would knock it down another notch. Now, CRCs allow for multiple inquires for certain products (generally mortgages and car loans) to count as one, provided they are done within a 14 or 30 day period. This more lenient treatment does NOT apply to CCs, however.
One key point can be inferred from the observations in the last couple of sections. That is, DO NOT ASSUME THAT YOUR CREDIT SCORING EXPERIENCE DICTATES WHAT OTHERS WILL EXPERIENCE. I've seen MANY people make claims like, "credit scoring doesn't work that way--I know because it didn't happen to me." Well, THAT SIMPLY DOES NOT FOLLOW.
E. Scoring seems headed towards consolidation.
The big recent news in credit scoring is the arrival of the Vantagescore . Among other useful revisions, this score will use an "Identical scoring algorithm and leveled credit characteristics across all three national credit reporting companies." That will make monitoring one's score much easier, and using the score significantly fairer to consumers. There is debate over how long it will take before this revision is phased in. Thanks to ksd for pointing out that consumers can get access to this score for $5.95 (as of July 2006) at vantagescore.experian.com .
F. Scoring is always individual, not "joint".
Unlike income taxes, where spouses can file "jointly" as one unit, credit scores are always individual. So, a wife can pay a household's bills on time for 40 years, and if she's never established credit in her own right, it WILL NOT MATTER if her husband dies, and she needs to get a mortgage or buy insurance on her own! Thus it's crucial that every adult establish the credit that they might need IN THEIR OWN RIGHT.
SECTION THREE: RULES FOR KEEPING CREDIT SCORES HIGH
While the subject of credit scoring is quite complex, the most important "rules" for credit scoring are simple and well known. You don't know what magic formula will get you an "A" on a UNKNOWN professor's term paper. Yet you do know that bad grammar, misspelled words, the wrong subject, and missing the page limits will keep you from getting a high grade. And you also know that if you do a serviceable job of following the guidelines of the assignment, and make sure you observe any firm rules, you'll probably do OK. Well, credit scores are similar. Follow the rules, and you might not get "straight A's", but you'll do just fine--and soon will get "high pass" grades. (If you have already "broken" the BIG rules--e.g., a chargeoff, bankruptcy, et cetera--then you need a credit repair strategy first. Other forums like creditboards.com are better suited for this. Please note that this isn't meant as a brush-off at all--just an acknowledgement that (1) I'm less informed on such issues, and (2) credit repair really is its own subject, and (3) sites that specialize in these issues do a better job than we could here.)
So, here are the key "rules," roughly in order of importance:
A. Do not EVER pay late.
Paying bills late enough so that they report as "30 days late" or worse is quickest way to drop your scores. OTOH, if you don't have any late payments, and all lines are marked "paid as agreed", it's difficult to get much lower than the 600s, regardless of what else you do. If you need to beg, borrow, etc, to make payments on time, do so! Do note that being a couple of days late on a payment will almost never result in it being reported as "late"...OTOH, going oversees and forgetting to pay that last Visa bill before you leave probably will, so BE CAREFUL.
B. Keep your apparent credit "utilization" low.
BOTH the percentage use REPORTED to the CRCs (which may differ from what's actually USED) on EACH available line, AND the total (aggregate) percentage used across ALL your REPORTING lines, are the crucial factors here. The degree to which these respective factors will matter varies considerably. I'll offer my more subjective opinions below. But it's safe to say categorically it's best NEVER to go above 90% on any line, especially a large line--and never to go above 50% on all your lines combined. Below the 90% threshold, there's ample evidence that 50% is a key level, and somewhat less evidence that 70% and 30% are used as "break points" for credit scoring models as well.
C. Seek higher credit limits.
Since low utilization is always better for one's credit score, it follows, that given the same credit usage patterns, higher limits will always generate higher credit scores than will lower limits.
D. Keep your "credit quality" high.
The best accounts are a single home mortgage (ideally infrequently re-financed), and one or more major UNSECURED bank cards (Visa, MC, AMEX, Discover, etc.), and perhaps one or two store credit cards. Car loans, personal loans, more store credit cards, etc. need not be big negatives, but they generally will do more harm than good. SECURED cards are to be avoided whenever possible.
E. Cultivate a long credit history and an old average account age.
The more established your credit profile, the higher your score. This is determined primarily via the age of your oldest REPORTING line (closed or open; credit card or mortgage, doesn't matter) and the AVERAGE age of ALL your REPORTING lines. Of course, there is only so much one can do to change this...it's largely a matter of time. But there are techniques that help. For example, lines in which you are an "authorized user" (AU) will often (but not always) report on your credit file.
F. Avoid excessive "hard inquiries".
Most credit-granting companies, and some banks/brokerages/etc. will "pull" a credit report from one or more of the three CRCs. (Customer service reps are often unreliable on whether and which reports get pulled.) They then remain on your report from that CRC for two years. Having more than one or so of these at a time is a negative, and having too many (generally 5-7 or more) may disqualify you for a particular credit product. Generally, the significance of these as a credit scoring factor declines after they are 6 months old. Once on, they are difficult to remove. One loophole: "bumpage", which results from generating numerous "soft" inquiries through such means as pulling your own credit via commercial services like PrivacyGaurd and through the solicitation of "pre-approved offers by other companies. Bumpage can remove inquiries from Equifax or TransUnion, but not Experian.
Note that while a few issuers pull credit at more than one CRC (notably cap1, which does all three), most will do only one. However, IME it's often tough to predict which one of the three it will be. I'm frequently told it will be x and instead it's y. One reason monitoring is can handy is because it lets you know how your previous inquiries are "distributed." For example, if you have 6 recent inquiries, but only two per CRC, you're not in bad shape. OTOH if all 6 are at one CRC, it would be best to avoid new inquiries that would pull yet another one from that same CRC.
G. Avoid frequently changing your "official residence".
One factor that makes a minor but measurable difference is how long you've remained at one residence, with longer periods being better. You don't have to keep physically living at the same place, of course (not that it would be feasible for many anyway)--just keep the address you list as your "official residence" for credit, bank, etc. purposes consistant where feasible.
OK, now that we've discussed the key rules, let's move on to some well-proven tactics.
SECTION FOUR: TIME-TESTED TACTICS FOR FOLLOWING THE RULES
A. Establish credit early.
Shortly after one graduates from high school, it's a good idea to seek out one or two high-quality bank cards with favorable terms and get approved for them, even if one doesn't intend to use them. After those report successfully for a year or two, then line increases and many more attractive offers may come your way...at that point, picking the cream of the crop and upping the mix to a few more cards can be a good idea. AS ALWAYS, the big caveat here is that one should only apply for credit if they have the self-discipline to use it responsibly.
B. Be choosy about the quality of your credit applications.
For example, one shouldn't "ghettoize" themselves by showing "secured" credit cards (NOT to be confused with "secured lines", like equity lines), rather than unsecured ones. If you are recovering from credit problems, it may be difficult to get unsecured bank cards, but in that case one should look for cards that will be eligible for conversion to unsecured cards within a reasonable period of time.
C. Use "authorized user" status strategically.
Many credit grantors will report AUs to the CRCs just as they would a primary cardholder. OTOH, if someone is removed as an AU, then they are required to stop reporting activity on that line. This opens up a world of opportunities for managing one's credit profile. For example, if you have a parent, spouse, etc. with a an older account and perfect payment history, it might help a great deal if you were to become an AU on that account--particularly if you have no or a short credit history. Also, if you're carrying a large balance on a card in which there are AUs, then have the AUs removed from the card until the balance is paid off. That way, the AU's utilization will come off much more favorable. The AU tactics are one more reason it's generally a bad idea to apply for "joint" credit. Far better to have one person apply as primary, and have the other apply as an AU.
D. DO NOT CLOSE ANY CC UNLESS YOU HAVE A SPECIFIC REASON.
Open credit cards that don't have any negative payment history only grow older with time, helping your "average age", payment history, and overall utilization factors. Counter to popular belief, closing the card won't remove it quickly from one's credit profile. It will fall off eventually (generally in 7-10 years from closure), but by that time it would almost always have been old enough to help your larger credit profile.
E. Time credit applications strategically.
If you are interested in, say, 3-10 new credit products, it's generally desirable to make sure that your credit report is at its short-term best, and then quickly submit all the applications at once--ideally the same day. This is the rationale behind the "AOR" / "App-o-Rama" / "application spree" strategy that's so often mentioned at FWF. There are several reasons for this. First, multiple same-day inquiries mean that one credit issuer often can't see that you've just applied elsewhere too. Second, some CRCs have not counted same day inquiries as more than one(!), which obviously helps that factor. Third, this "bunching" means that all the new credit grantors don't see the new "unseasoned" credit on your report, since it won't be reported to the CRCs until after their decision to grant you credit has been made. Forth, getting the "damage" of multiple applications over with in batches will give the report time to "heal" (inquiries will drop off, new lines will season, etc.), meaning that within a year or two one's score can be as high or even higher than it was previously.
F. Think through your "official" address.
For example, one who is renting an apartment for a year or two only near their college campus might apply for credit from their parent's address, and not switch that address for several years until they have a stable place of their own. (It goes without saying that this requires that you have complete trust with your parents!) Another example: if you have two homes, and spend part of the year at each, it's probably best to only apply for credit at the address that's been associated with you the longest.
SECTION FIVE: MONITORING YOUR CREDIT
A. Why Bother?
There are several reasons to monitor one's credit report and score. First, credit grantors and CRCs both make errors all the time, many of which can reduce your score. The only way to keep this from happening is to check the reports regularly, and dispute anything that's outdated or otherwise in error. Second, monitoring one's report identity theft is a growing problem
B. FICO, FAKO, Vantage, and other "scores"
For purposes of this FAQ, I'll stipulate that one's "true" credit score is simply what the inquirer will receive from the CRC at the time they submit their request. I DON'T mean that it's what one's credit score "ought" to be, or even that the score is derived from correct data.
It can be maddeningly difficult to obtain your "true" credit score. Virtually all of the credit scores sold through monitoring services are "FAKO" scores: made up scales that correlate only very loosely with true credit scores. Moreover, even if you can get a "true" score, it may very likely be a different score than the one your prospective lender will receive, since they may pull a different CRC's report or even a different version of the same CRC's "true" score.
For these reasons, it's a good idea to politely ask the lending officer to provide you with the score they received upon your applying for credit/insurance etc. Many are not supposed to share this with you, but in my experience they often are willing to. Some lenders (e.g. PenFed mortgages) even send you a written statement with the scores they received on you.
C. Getting Access to your Report and Score
Note that obtaining your own score directly (vs. through a lender) is never counted as a "hard" inquiry, and thus DOES NOT negatively impact your score.
While you can't get your scores for free, you are entitled to get one free report from each of the CRCs every twelve months.
I know of several monitoring services that provide credit reports and "FAKO" scores. Examples include Privacyguard and Truecredit . I subscribe to both, at around $100 yearly, but only because they both allow me to pull new credit reports every day. Other FWF users have reported that they are no longer given access to new reports each day.
Providian/WaMu credit cards provide you with a free "Bankcard Industry Option FICO score", and update it monthly. This perk is one reason we picked up the otherwise unexciting WaMu card. (See CreditGuy's posts below for more on this.)
SECTION SIX: RELATED ISSUES AND LINKS
My hope is that we can try to limit this thread to issues of getting and keeping high scores, as that is more than complex enough on its own terms (as the length of this OP demonstrates.) For related matters, please visit the following:
-Strategy and rationale for getting higher credit limits is here.
-Making money from credit via invested proceeds is discussed in detail here
-Getting LARGE credit lines is discussed here.
-Reallocation possibilities for credit lines are discussed here
-A useful list of 5% rewards credit cards is here.
There are also many, many threads that discuss great credit card offers and individual AORs, and new ones are constantly popping up.
Appendix: A Credit Glossary
This subject is complex enough so that a glossary seems warranted. Please suggest added terms:
-Credit Inquiry (also called "hard pull" or "hard inquiry" ) This is a request from some institution to access one form or another of your full credit report from one or more of the CRCs. By law (namely the FCRA), it can only be done for a "permissible purpose". Basically, this amounts to your asking to begin or continue a business relationship with the institution.
-Credit Report The list of information that a CRC compiles concerning your personal (or business) credit history. It will include personal information, open and closed credit, and balances, and payment histories.
-Credit Reporting Companies (CRCs or CRAs) For-profit companies to whom credit grantors report data about your credit lines and loans, payment history, and balances. The "big three" are Equifax, Experian and TransUnion, and they are typically the only ones that matter.
-Credit Score Generally (but not always) a 3-digit number assigned by a CRC to a credit profile. There are many different flavors of scores, and significant differences between flavors are common. Also note that there are many "scores" generated by CRCs that never get issued to a third party--so their practical effect is nill. These are sometimes billed as "FAKOs".
-FCRA, or Fair Credit Reporting Act. The major piece of federal legislation that spells out the rights and obligations of consumer creditors and debtors.
-Secured Credit Card A credit card which has a limit equal to funds set aside by the borrower that guarantees repayment. Usually, this takes the form of a bank deposit. For example, ABC credit union says, we'll give you a $500 visa limit if you give us $500 up front that "secures" the card. These are generally offered to people with poor or no credit. Some can be converted to more desirable unsecured credit once a good payment history of a certain duration is established.
-Secured Credit Lines. While this is sometimes used misleadingly to refer to a "secured credit card", it is commonly (and more accurately) used to refer to credit lines secured by physical property owned by the borrower, such as real estate or business equipment. A home equity line of credit (HELOC) is the most common form of secured line available to consumers.
OP content edit history:
7/19/06 OP, rearranging of sections
7/20/06 added table of contents, glossary, "related links" section
7/21/06 Added PM/email disclaimer, "seek to raise limits" rule, fixed WaMu credit score details (Thanks CreditGuy)
7/23/06 Updated "FEATURES OF CREDIT SCORING" section to include entries on "Scoring models and their key "inputs" are evolving", and "Scoring is always individual, not joint" per responder inquiries. Added link to the "higher credit limits" thread, and request that posts fitting better there be steered in that direction.
(This post and others written by its author are hereby licensed under a Creative Commons Attribution-ShareAlike 2.5 License subject to pertient enforceable provisions of the Fatwallet user agreement.)
