Miranda Tsotsoria

• Blog
  • General
  • Foreclosures
  • FSBO
  • Investing
  • Mortgage
  • News
• Home
• Featured Listings
• MLS Property Search
• MLS Market Snapshot
• Search Foreclosures
• Zillow Home Valuation
  • Zestimate Home Value
  • Zindex Price Index
• Buyers
  • Buyer's Hotlist
  • Property Search
  • Dream Home Finder
  • Relocation Help
• Sellers
  • 24 hour Market Valuation
  • Neighbor's Home Value
  • Find Relocation Help
• Resources
  • Local Information
  • Local Weather
  • Local News
  • Local Schools
• Mortgage Tools
  • Mortgage Calculator
  • Prequalify Now
• Free Reports
• Get to Know Us
  • Contact Us
• Mendham, New Jersey
• Privacy Policy
• 50 Reasons to Use a Buyers Agent

Which of the following actions are likely to hurt your credit score?

• Closing an old credit card account that you rarely use.
• Opening a new charge account to get a department store discount.
• Spending to your cards' limits.
• All of the above.

The answer is "all of the above." Each of these actions can hurt your credit score, which in turn can hurt your effort to get the best rate on a loan—or to get a loan at all.

How your score is determined

When you apply for a loan or fill out a charge account application, most lenders request your FICO score, which is named for its developer, the Fair Isaac Corporation of Minneapolis, Minnesota. 

Your FICO score is intended to tell the potential lender how reliable a borrower you will be, says Barry Paperno, consumer operations manager at Fair Isaac. In compiling your score, the FICO scoring formula tries to answer these five questions:

1. Do you pay your bills on time?
2. How much of your available credit are you using?
3. How long have you been using credit?
4. Have you taken on more debt recently?
5. Have you managed different types of credit well?

The answers come from an examination of your credit reports at the nation's three consumer credit reporting companies: Equifax, Experian, and TransUnion. These three companies keep records of your day-to-day credit use. You have a FICO score based on each of your three credit reports.

Your score, which ranges from 300 to 850, is a compilation of what a credit report says about you at any given time. So it can change in a short period. It can fall if you miss a payment and rise if you pay down a balance, for example.

So closing an old credit card account can lower your FICO score because it changes the proportion of available credit you are using. That's why when you pay off an old credit card, it may be better to leave it dormant than to cancel the account.

Opening a new account can also lower your score. Taking on additional debt can increase the risk that you won't pay back what you already owe, especially if your credit history is short.

Spending to your cards' limits is also a red flag. It suggests that you may be overextended, which can increase the risk that you'll start to miss payments.

Wrong information in a credit report can also hurt your score. You are entitled by law to get a free credit report from each of the three credit reporting companies each year. You can get your free reports at www.annualcreditreport.com.* You may receive offers for credit monitoring services at the site, but you don't have to accept them to get your credit report.

Your credit score, on the other hand, is not free. Fair Isaac charges $15.95 for a credit score based on one credit report and $47.85 for all three at its website, www.myfico.com.*

Should you pay for your credit score?

You may not need to know your credit score if you already have a sufficient amount of credit available and don't foresee the need for additional credit anytime soon. But if you are thinking about applying for a loan, knowing your credit score—and how to improve it—may save you money.

Though lenders base their decisions on many factors that aren't part of your credit score, including your income, a higher score generally leads to a lower interest rate.

In practical terms, that means homeowners with low FICO scores may pay hundreds more each month on mortgages than their neighbors who borrowed identical amounts but who have sterling FICO scores (see table).

Source: MyFICO.com. Mortgage interest rates as of October 3, 2008, based on the national average. Monthly payments are based on a $200,000 loan amount and do not include insurance or real estate taxes.

Four ways to improve your credit score

1. Pay your bills on time. Payment history is typically the most important of the five factors that make up your score. If you have a history of paying on time, you're considered more likely to pay on time in the future.

2. Don't borrow to the limit. Amounts owed is the other big factor. Keeping balances at a low percentage of your available credit, whether or not you pay them off in full each month, helps your score. Lenders don't worry that you have the capacity to splurge. Rather, they see you as someone who manages credit well.

3. Be a loyal customer. Having a charge card for decades can raise your score, and opening new accounts can lower it. So it may not pay to switch from old credit cards to new ones for a short-term gain, such as a low introductory interest rate.

4. Use different types of credit. Effectively managing both revolving accounts, such as credit cards, and installment accounts, such as an automobile loan, improves lenders' perception of you.

*When you access any of the sites mentioned in this article, you will be leaving our site. We are not responsible for the accuracy of information on third-party sites.