It is a myth to believe that always being good when it comes to your "Credit Behavior" is good for your credit. While it is true that good behavior generally boosts one's credit worthiness, there are right and wrong ways to be good when it comes to your credit.
Let's look at the known facts. Your credit score is widely used by lenders to decide whether to grant you a loan, and at what rate. That score, typically ranging from 300 to 850, is an assessment of your individual credit worthiness based on your borrowing history and your ability to repay your debts.
The key to your credit scoring is to understand the rules of credit scoring in the first place, and turn them to your advantage. Let's examine those keys:
1 - Having too few credit cards can actually hurt you:
A thin credit profile doesn't give a lender enough evidence that you are capable of paying back your debts on time compared to someone who is managing multiple cards and loans.
If you only have one credit card, consider opening another credit card account to help boost your credit rating. Don't, however, apply for more than a couple of cards in a short period of time, as each new card request will trigger a check of your credit history, and the inquiry reduces your credit score by several points.
Above all, don't apply for several credit cards in an effort to build up your credit score, and then defeat the intended purpose by running up charges on those new cards that you can't pay off right away.
2 - Paying Your Debts in Full Could Hurt You:
One of the biggest factors in determining your credit score is the amount of money you've borrowed compared to your actual credit limit on each account. The best scenario is to limit your charges to 30% of the maximum limit on the account. But even if you pay your bill in full, it can sometimes look as if you're exceeding that 30% threshold, because your score reflects what you owe when your credit card issuer files its report to the various credit bureaus. Timing of that filing could be critical to your credit report if the report is sent right after you've just made a large purchase, even if you had planned to pay off that large purchase in full.
This really comes in to play if you're applying for a loan during that short window when your credit score takes a hit for that big purchase. The best advice, if you're going to be applying for a loan in the next 60 days for a car, house, or other large purchase, delay buying that 60 inch plasma television set until after you've applied for the new loan.
3 - Shifting Debt Could Hurt You:
It sounds like a reasonable thing to do. You get an offer to consolidate a high interest credit card over to a low (or no) interest rate card and closing the higher rate account. This could backfire on you.
Say you have two credit cards with a $5,000 limit on each card. If you owed $1,250 on each of those two cards, your combined balance ($2,500) equals 25% of your total credit limit of $10,000. If you close the higher rate card and transfer the balance to the lower rate card, you now have a $2,500 balance on a card with a $5,000 limit, meaning you now have a debt amount of 50% of the available credit limit. The net effect gives you a lower credit score.
The better option would be to keep both accounts open and put the higher rate card in a drawer and don't use it. Or, better yet, pay off both cards with an installment loan while keeping both credit card accounts open. That way, you retain your $10,000 credit card limit while actually reducing the debt on those cards to zero. The trick is, don't borrow to pay off the credit cards, and then keep using the credit cards.
4 - Being late, only one time, will hurt you:
Even if you're always on time, or even early, paying your bills, your score will drop if your payment is 30 days or more past due on any account that reports routinely to the credit bureaus.
It doesn't matter if you've always paid more than the minimum due each month, and paid 15 days ahead of the due date on your statement. The one time you get side-swiped by some unforeseen expense which keeps you from paying on time, is when your credit score takes a major hit.
So what is the best way to have your credit realize the maximum score possible? Have two to four credit card accounts, all older than six months, and preferably a bank loan as well, with no late payments in your credit file.
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