What You Can Do to Maintain a Good Credit Score

By Ilyce Glink

My credit score just dropped 8 points thanks to my opening up a Banana Republic Visa card last month in order to save a significant chunk of cash on my fall wardrobe purchases.

I know that my credit score has dropped because for the last two months I've been testing out a new product from Equifax called DebtWise. As part of its offerings (which include a tool that helps you figure out how to quickly pay down or off the debts you carry), you get four free credit reports and FICO credit scores.

I didn't really need a new credit card, but I thought it would be great to save over $100 on my purchase. I also wanted to see what would happen to my credit score, which has been comfortably over 800 for the last few years.

When I logged onto the site, I immediately saw that the new credit account was hurting my score.

The site accurately noted that I opened up the new credit account in the last month and that FICO "high achievers" (which I suppose means people who have credit scores from 760 to 850), on average opened up their last credit account 27 months ago.

The site explains, "People who recently opened a new credit account are slightly more likely to miss future payments than those who have not." And, it advises me not to open up any new credit accounts at this time. Generally, it continues, "if you don't plan need or plan to use credit, don't apply for it."

What's helping my score stay high is that I have no missed or late payments on any of my credit accounts. DebtWise tells me that 93 percent of FICO high achievers have never missed a payment. Of the 7 percent who have, that missed payment was four years ago, on average.

How long you've had an individual credit account is an important part of the credit score calculus. According to DebtWise, people with top credit scores have had a credit account open for average of 19 years. I've had my Discover Card account for more than 20 years. The average length of credit for my accounts is over 10 years, which falls within the average of 6 to 12 years.

I'm often asked how using the credit you've been extended can help or hurt your credit history and score. The simple answer is this: You want lots of credit extended to you but don't really want to use very much of it. That's why it's so painful when banks cut off your home equity line of credit: What you owe doesn't change, but the new debt-to-credit limit might be 100 percent!

Credit experts say the smartest credit move you can make is to never use more than 25 percent of your maximum available credit on a particular account. In other words, if your credit card has a $10,000 line of credit, don't carry a balance of more than $2,500 to $3,000 -- or 20 to 30 percent. Better yet, don't carry a balance at all.

As a rule, I don't carry balances on credit card accounts -- I simply don't purchase more than I can pay off at the end of the month. That helps my credit history and score, but charging something on a few cards each month helps, too. It shows the credit reporting bureaus that you can manage credit.

A few months ago, someone called my radio show to respond to another question about credit. She recently worked in the credit industry and wanted callers to know that the optimal number of lines of credit to keep open (and helping stoke your credit score) was four.

The four lines of credit should be different: a mortgage, car loan, home equity loan, home equity line of credit, credit cards, school loans or other personal loans that are reported to the credit reporting bureaus.

Any four of those will do, but you should try to mix up the categories a bit. Having four different credit cards will help your credit history and score, particularly if you've had them for 20 years. But if you throw a mortgage or school loan into the mix, it's even better.

As DebtWise says, "People who demonstrate responsible use of different types of credit are generally less risky to lenders. You helped your FICO score by showing recent use of a credit card." How comforting.

Of course, the big problem with credit scores is that there are plenty of folks who had 800 scores or above who lost their jobs in this Great Recession -- and then ran out of money to make their mortgage and debt payments. I'm convinced that if the majority of them had kept their jobs, they'd have continued to make their payments on time, as their credit scores predicted they would.

Credit scores are useful tools, but they don't predict what will happen to an individual's ability to repay a debt when faced with total financial collapse. And that's the problem with relying almost exclusively on a credit score for your underwriting.

I can assure you that I'm not any more likely to miss making a payment after a lifetime of paying on time -- even if my FICO score now shows a drop of 8 points.

I just wonder if it will take two years of on-time payments to push me back up to where I used to be.

Ilyce R. Glink's latest book is "100 Questions Every First-Time Home Buyer Should Ask: With Answers from Top Brokers from Around the Country" If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce's Web site, www.thinkglink.com.)

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