A savvy consumer is wary, but knows the score

Posted May 31, 2009, at 10:40 p.m.

Remember the good ol’ days when credit limits meant something, lenders reviewed credit applications, and the livin’ was easy? I hate to break it to you, but those days are gone.

Now banks and credit card companies are thrilled when customers slip over their credit limits (read: big, fat, juicy fees), and lenders toss credit applications aside, relying solely on each applicant’s credit score — that three-digit number that controls our lives.

Until recent years, consumers were not allowed to know their credit scores. Even now, with credit scoring out in the open, it is still mysterious. Like it or not, though, our scores shape our financial futures. We dare not ignore them.

Your credit score determines how much interest you’ll pay on a mortgage and how much you pay for your insurance. Credit scores are considered when employers make their hiring decisions. You need to know how to achieve a great FICO score. Good is considered 700 to 759, while 760 to 850 is excellent.

Recent changes to the most widely accepted scoring model, FICO 08, have proved to be advantageous for many consumers. This new version ignores small collections that may appear on your credit report. It is also less punishing for those who have had a serious setback, such as repossession, provided their other active credit accounts are in good standing. The new version of the credit scoring formula allows some authorized-user information to be included when developing that person’s credit score.

But it’s not all good news. Here are three areas in which changes in FICO 08 could send your score plummeting:

• Credit limits. FICO 08 is sensitive to how much of your available credit you are using at any given time. If you are maxed out on a credit card, you’re using 100 percent of your available credit. That is bad. You never should use more than 30 percent, even if you pay your balance in full each month.

• Closing accounts. Now, more than ever, you should not close credit card accounts. If you were to close one, you would reduce the total amount of your available credit, which could seriously damage your credit score.

• Keep them active. While it pains me to suggest such a thing, if you want an excellent credit score these days, then the accounts you have need to be active. That means using each one for a tiny purchase every month or so, followed by an immediate payment that brings it right back to $0.

Credit scores are not free. You can purchase your TransUnion FICO score or the Equifax FICO score at http://www.myFICO.com for $15.95 each. You can do an Internet search for “credit score estimator.” You’ll find several Web sites that can give you a close idea of what your score would be if you purchased it.

To learn more about your credit score, how it affects your life, and how you can improve it, go to http://www.myFICO.com and click on “Credit Education.”

Mary Hunt is the founder of www.DebtProofLiving.com and author of 18 books, including her latest, “Can I Pay My Credit Card Bill With a Credit Card?” You may e-mail her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, Calif. 90723.

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