The FICO Battle: Ten Common Tactical Mistakes When Dealing With The Credit Score Blues

When people discover a problem with their credit score, they often act rashly, doing things that seem as though they would improve your credit, but actually damage a credit score. Before we get into the ten mistakes to avoid, let’s first look at what makes up one’s credit score, as defined by Fair Isaac:

Although the exact formulas for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following components and the approximate weighted contribution of each:

35%,- punctuality of payment in the past (only includes payments later than 30 days past due)
30% – the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
15% – length of credit history
10% – types of credit used (installment, revolving, consumer finance)
10% – recent search for credit and/or amount of credit obtained recently

Mistake #1: Cancelling old credit cards. 15% of your credit score comes from the length of your credit history. Thus, cancelling your oldest credit card can often be a mistake. Also, if you have balances on other cards, cancelling an old credit card can also worsen your debt ratio, which makes up 30% of your score. If you don’t have other sources of credit that are older than seven years, you should not cancel your oldest credit card.

Mistake #2: Staying current on “most” of your cards. 35% of your score focuses on punctuality of payment, with only payments that are more than thirty days late affecting your score. If you’re going to be late on any cards, make up that payment before it’s thirty days late. Don’t keep up with all but one or two of your cards and let those go later and later; instead, juggle the cards a bit if you have to, but make sure you are not too late on any one card.

Mistake #3: Having too many open lines of credit. 10% of your score comes from the types of credit used. If you have a lot of sources of revolving credit (i.e., credit cards), you can be seen as a credit risk because you have the potential of racking up a lot of debt very quickly. Don’t open store credit cards just to get a discount, and if you have any recent store cards, cancel them once they’re paid off.

Mistake #4: Maxing out your cards. 30% of your score comes from the ratio of your credit card debt and your credit limits. Thus, if all of your cards are maxed out, your credit score is suffering even if you’re keeping up with the payments. Instead of charging and buying more and more, focus on paying down the cards with extra payments.

Mistake #5: Avoiding loans and debts. In the eyes of your credit report, no debt is effectively bad debt. If you’re a credit card teetotaler, you should still consider getting one and making an occasional purchase with it. I have a friend who has one credit card which is associated with his gas station chain of choice. He uses it just for gas purchases, racks up discounts on it, pays it off in full each month, and it helps him maintain a solid credit score in case he needs a loan.

Mistake #6: Requesting a credit limit reduction. Some people believe that they have too much credit and that they’re better off with a credit limit reduction. In fact, the only significant effect a limit reduction has on your credit score is a negative effect on your debt ratio. Only get a limit reduction if it has a huge psychological value for you; otherwise, it will hurt your credit score.

Mistake #7: Utilizing the first credit counseling service you hear about. Quite often, the ones that advertise the most are the ones that do the shoddiest job. Use the FTC’s advice and find a reputable credit counseling service in your area. Call several of them from the yellow pages and ask the questions from the FTC page to find ones that seem legitimate, then check with the Better Business Bureau before moving forward. Remember, your credit score will affect many of your financial moves for years, so don’t skimp out on your research if you’re thinking of using a counseling service.

Mistake #8: Declaring bankruptcy. Many people go forward with bankruptcy because they believe it’s the only way out. Instead of taking such a drastic measure, seek counseling first with one of the more legitimate sources mentioned above. Bankruptcy can really decimate your credit score for a very long time. Quite often, there are better solutions, such as negotiating with creditors and so forth.

Mistake #9: Practicing credit card arbitrage. This game can seriously damage your credit score if you’re not an expert. Shy away unless you’re financially stable and know exactly what you’re doing; if you make a mis-step, your credit score could easily be demolished.

Mistake #10: Never checking your credit report. Most people who behave well with their credit just assume that their credit is fine, but sometimes incorrect things can show up on your report. Visit annualcreditreport.com to get the free report that the United States government guarantees you from the three major agencies. Don’t go to freecreditreport.com; it’s a rip-off.

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  1. Jonathan says:

    Another huge one is not falling for the “Save 10% by opening a YaddaYadda card…”.

    Opening credit cards at retailers to save money can seriously cost you FICO points.

  2. Zach says:

    What kind of late payments affect your credit score? Does paying your electric bill two months late affect your credit score? Cell phone bill?

  3. Vera says:

    I wouldn´t beleive it. The only thing credit institutions and these guys, as their colaborators, want is that you pay interests and in the case you can´t, have a way to deduct it from taxes.
    The best credit that you can have is a solid reputation in your media.
    But . . . at the end why do you want credit for?
    To make the rich richer?????

  4. sellars says:

    Is there a similar Website to annualcreditreport.com for Canada?

  5. Dman says:

    I was always told that shopping a loan (looking for the best rate) didn’t hurt your credit score because the credit monitoring agencies are supposed to treat multiple inquires within a specified timeframe (one week to one month depending on who you ask) as a single event. I have found this to not be true in practice however. Shopping for both a car and home loan had a detrimental effect on my credit when no other financial transaction occurred in my credit report. This happened in both instances, whether or not I ended up taking the loan.

    In simpler terms, get your score as high as you can before making a large purchase, because the actual transaction will take away a few points from your score in the short term. Thanks for an interesting read.

  6. Boomer says:

    Who runs annualcreditreport.com and what makes you think it’s a reputable outfit? How do we know that they didn’t sponsor this article?

  7. Screw the better business bureau. As long as you pay your dues they’ll say you’re a good business.

    Check http://www.ripoffreport.com, as they don’t do this.

  8. Quang says:

    Great Tips man, I am definitely going to del.icio.us this one- I’ve heard that you should only have 2-3 credit card max (1 visa, 1 mastercard, and possibly 1 ‘entertainment’ card (amex etc.))

    But the 2nd school of thought is to have a great credit history/dept ratio…

  9. Trent says:

    Boomer: annualcreditreport.com is run by the Federal Trade Commission, a part of the United States Department of Commerce. You can read all about it at http://www.ftc.gov/bcp/conline/edcams/freereports/index.html

    annualcreditreport.com is the government’s portal for the credit reports that are guaranteed to you by law.

  10. bob says:

    A mate of mine who used to work for a bank gave me this tip: don’t pay off just the minimum payment on your credit card(s) each month but pay off a bit more (even just $1), this will improve your credit rating.

  11. trevor Nohcud says:

    It is always best to pay cash and live within your means.

  12. Wendell says:

    On what evidence do you base the idea that negotiating with creditors is better than bankruptcy? Negotiation works where you have capital to make a deal immediately; not for stretched consumers who have to accumulate the payments. High-cost negotiation services have popped up that are as bad or worse than bad credit counselors — and they depend on this sort of advise to thrive. The reality is that if your credit score is shot already and you can’t pay the debt off within a couple years, a bankruptcy will rebuild your credit faster.

  13. Trent says:

    Wendell: you’re better off avoiding bankruptcy if you can, because bankruptcy stays on your credit history for ten years, while other mistakes wash away in seven. A bankruptcy makes the dings go away, but it means your credit is almost completely shot for ten years because only risk-bearing lenders will lend you money – and charge you big for it, while if you start paying your debts down now, your credit can easily recover in a few years.

  14. Ken Savage says:

    #7 was a problem for me. I went with a service that a “friend” said helped them out a lot. Later I found out that it was a college friend of their’s and he abandoned me half way through our agreement and still came after me for the $600 bill.

    thx Trent.

  15. Brian says:

    Great tips. As far as monitoring your credit report I’d recommend a service like protection4myidentity.com which I subscribe to through my credit card. Not only does it monitor your credit report for activity but you will also receive a quarterly credit report. Pricey yes, but worth it to prevent fraud and keep an eye on your credit history.

  16. Great post and overview on key mistakes to try and avoid. It is unfortunate to see people try to rebuild their credit score and commit these mistakes as they think it will help.

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  18. briana says:

    It’s very confusing when you try to fix your credit score. I went to my credit union recently to try to get a lower-interest loan to consolidate my remaining credit card debt, and they would only arrange it if I canceled my two oldest credit cards with the best payment history (as these are also the ones with the highest limit) OR asked for a credit limit reduction on both of them and canceled my newer cards. When I mentioned my concerns about closing out these accounts, they told me it wouldn’t hurt my credit score, because we would still have some credit activity with the loan, our mortgage and so on … but I’m not so sure.

    I’m also confused about what to do about paid-off financing from an electronics store (I bought a computer on store credit a while back). I’m not sure how this type of loan is looked at, and if it’s better to leave the line of credit open (even though I’m not using it) or whether I should close it.

    It seems like there’s a lot of conflicting information about the things that can affect your FICO score … while everyone agrees you should pay your bills on time, it’s not as clear what to do about old unwanted accounts. As someone else found, we also discovered that using a mortgage broker had a negative effect on the score as well, because there were so many inquiries from lending agencies in such a short time period. I don’t think it was a big dip, but we had no idea that would happen ahead of time.

  19. Matt says:

    briana – I agree with you. I am considering obtaining a lower interest personal loan to immediately pay off some lingering revolving debt, and then turning around and applying for a mortgage as a first time homebuyer. On the surface it ‘feels’ as if have $0 revolving debt will be cleaner… but I am worried that having the installment debt will actually adversely effect my credit score. The problem is that I am getting conflicting recommendations on that very point. Does anyone have any solid advice on this?

  20. Matt says:

    For Canadians, equifax.ca will send you your score for free via mail

  21. Nicola says:

    I have a line of credit with Empire today for $3500. I have never used their credit and I really don’t plan in using it in the future. Should I keep the line of credit open? Please let me know.

    Thanks

  22. Jeremy says:

    People also need to check their credit score from multiple sources. I think only the Fico site gives out the Fico score. I think all of the agency sites give out their own branded score which can differ greatly from the Fico.

  23. SWG Credits says:

    #11 Avoid Credit.

    I don’t see why people need to live outside their means.

  24. Kai says:

    I have recently applied for a credit card and would like to cancel it in 1~2 month. Would that be bad for the credit score? Thanks!

  25. patti says:

    seems like #1 and #3 are contradictory. I have several old cards, 20+ years with no balance…most never even used at all. When I purhcased my home, these cards went against me, as in #3. However, #1 says not to cancel your older cards. Which one is it?

  26. citi says:

    comment#13
    in Canada we use the same system but a bankruptcy goes away after 7 and i also recommend doing customer proposals as they only stay on for 6 years… also if going bankrupt i advise paying of one lender in full as they will do business with you in the near future … reference that you payed them off in full

  27. troy says:

    I go along with the Dave Ramsey credit score view, in that those that have their finances together shouldn’t care about their credit score unless that score is needed to EARN INCOME.

    For most people, that is not the case, therefore quit worring about your score, and the components that make it up,and focus on the components that make up you wallet and it’s contents.

    In fact, Trent, I know you are actively trying to get out of debt which is wise and you also know a credit score is an indicator only of debt management, not income, or assets, or frugality, or any type of financial competence.

    Remember, a credit score has rarely made anyone rich because it is virtually impossible to borrow your way to wealth.

    Love your site,though, and your tenacity toward your financial future. cheers

  28. Jake says:

    Equifax gives your FICO score, but not from all 3 bureaus just from Equifax. As far as I know the only place you can get your FICO from each of the big 3 is from myfico.com. Equifax just released a free trial of their credit watch gold product that features a free 30 day trial (FICO included) that is worth checking out.

  29. Kim says:

    We just did ch 7 bankruptcy and our credit scores went up. Plus, we had enough positive accounts with no balances that helped as well. We were able to rent an apartment with no extra deposit (a nice one at that), get utilities with no deposits, get a car from a reputable dealer without being gouged for interest, and are getting decent credit card offers (which we do not take) pouring in. The truth of the matter is that how much you suffer post bankruptcy has much to do with the state of your credit BEFORE the act. If you have paid off several cars, have plenty of empty credit cards in good standing, have never had a repo, etc… it doesn’t hurt as much as you might think. At this point, our issue would be buying a house. We aren’t interested in that right now though. But as soon as we save our 20%, I am sure that there will be a reputable mortgage company willing to come to the table. Especially since we owned before and never had a late pay. As I said, your experience after BK depends much on your pre-BK credit.

  30. Kim says:

    It is true that Equifax is the only one that actually uses the actual Fair Isaac Score. you can go to myfico.com to get your three scores, but only Equifax is an actual FICO. the other two are proprietary formulas.

  31. Logan says:

    Kim – TransUnion and Experian still use the FICO scoring algorithm, they just have additional (proprietary) calculations that factor into their individual scores, so the advice in this article still holds true. It might be not as exact, but avoiding those mistakes will still improve all 3 of your scores.

  32. Mark says:

    I currently have two credit cards from stores and one from AMEX (3 total). One of the store credit cards has a $4,000 limit but has very little use to me. Is keeping a $0 balance on this card more beneficial to alleviating the 30% debt ratio than canceling it to help the 10% obtained credit portion of determining my FICO score?

    Also, I was thinking of getting a fourth credit card from Chase, but I’m worried it will hurt my FICO score since I recently applied for and received my AMEX card. Is getting the Chase card a bad idea?

  33. It is unfortunate to see people try to rebuild their credit score and commit these mistakes as they think it will help. Thank you for the reminders.

  34. Good Post. Another mistake is doing nothing about your credit when it’s bad. So many people just think it will go away or that it cannot be repaired. Not true. Thanks for the post.

  35. Jones says:

    Thanks man for sharing this important stuff with us. Keep rocking.

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