So you have seen your credit report and score and said what can I do to make it better?  You take a look at your report and realize that there are three national credit cards with nothing owed on them and that you haven't used for years.  After giving is some thought logic says "close those accounts because I don't need them and I have heard that too much credit hurts my credit score".

Slow down a second logic is wrong!  While it is true that too much credit can hurt your credit score, the models typically compute the ratio of outstanding credit card balances to your credit limit.  This calculation plays a major role in your final score (about 30% of your score comes from here).  Most models start to drop your score when the outstanding balance on your cards hits somewhere between 35%-40% of your credit limit.  So closing those accounts takes away credit limits which are used in the overall calculation thus potentially lowering your score not increasing it.  Some folks decide that it is better to consolidate all their cards onto one card both for convenience and possibly a lower initial interest rate.  This is almost always a mistake because your ratio goes over the 35%-40% mark and hurts your credit score.  While it is true that cards with high limits may hurt while trying to buy or refinance a home, wait for the lender to tell you that you have too much credit available before you close anything out.

A very quick way to ruin your score is to miss payments.  Make certain that all of your monthly payments are paid on or before they are due.  One of the best ways to do this is through automatic payment set up through a bill payment system or on-line through the creditor.  Don’t miss payments!

The following is a rough breakdown of how most credit scoring models weigh your credit data:

A quick look shows that fully two thirds of your credit score is made up of what you owe and how you pay it back.  So a sure way to wreck your score is to miss payments or max out your cards.

I’ll discuss some other “do’s and don’t” in the near future because

It’s Only Money!