Photo (cc) by Andres Rueda
You pay your bills on time, so you expect a good credit score, right? If only it were that simple. In fact, your credit score is determined by a number of different things, and not just by your payment history. Here’s where it gets downright strange: Some of the ways to improve your credit don’t even make financial sense…
1. Your score improves when you have a lot of loans
According to FICO, the company that generates the most important of all the credit scores, 10 percent of your score is determined by the types of credit used. That means that someone with car loans, student loans, and retail store accounts may actually have a better score than someone who has only one type of loan; and way better than someone with none.
2. More credit cards can mean a better score
Another 10 percent of your credit score is determined, in part, by the amount of credit you use. While it makes sense that using less credit will help your score, it’s the other side of the equation – the amount of credit you have – that leads to this strange effect.
By opening up more than just one or two credit cards, you can increase your available credit and reduce the percentage of credit used. In the same way that having more credit cards reduces your overall credit usage rate, asking for a higher limit will also achieve the same effect.
3. You have to pay your credit card balance every day to stay out of debt
As someone who always pays his credit card balances on time and in full, I was astonished to see that my credit report showed that I owed money on each of my cards.
The simple explanation is that your balance on any given day is always reported to the credit bureaus as a debt. I’ll still pay my balance only on the due date, but I might pay earlier or avoid credit cards if I was trying raise my score to get a home loan.
4. Don’t cancel a credit card
Another 15 percent of your credit score is determined by the length of your credit history. One of the factors that’s included in this calculation is the average age of your open accounts. While I’ll always jump at one of the top credit card sign-up bonuses, I keep one card with no annual fee, year after year, just to improve this statistic.
5. Shop fast
It’s wise to take your time and shop around for the lowest mortgage, car, or student loan, right? Actually, FICO will count repeated inquiries for new credit as a single inquiry, so long as they are all done within 30 days. Take longer to request competitive loan offers and you risk harming your credit score by having too many inquiries.
While credit scores are determined by mysterious recipes that are never fully disclosed, FICO and others give us many clues about what ingredients are included. By understanding how the credit agencies view your finances, you can make the best decisions to maximize your credit score. To learn more, read 3 Tips to Improve Your Credit Score – Fast.