We've talked about credit scores here a lot and how they can save you tons of money, not only on loans but on services such as car and homeowner's insurance. As such, you need to consider the impact various moves you may make could have on your credit score. Personally, I wouldn't be obsessed with having a high credit score, but I would (and do) at least make sure I don't shoot myself in the foot credit-wise simply by making foolish moves.
And what are those foolish moves? MSN Money lists seven of them as follows:
1. Closing credit card accounts.
2. Letting credit cards collect dust.
3. Running up high balances.
4. Applying for new credit repeatedly.
5. Not paying fines or other bills.
6. Ignoring mistakes on your credit reports.
7. Making late payments or skipping them entirely.
Here's what I've done to earn a great credit score myself:
1. I have no debt. We paid off our house over ten years ago and haven't had continuing (over a month) debt since then.
2. We do use credit cards (as regular readers know), but we only use them to buy things in our budget and we pay them off in full every month when the bill is due. We've never had a late payment or paid any interest.
3. We only have a few cards. Right now, we're in transition credit card wise but we generally have two cards (a main one and a back up) as well as one other that technically we could use but haven't done so in several years (it's kept in our files).
4. We don't run up high balances. As I said, we don't keep balances at all.
5. We don't apply for credit regularly. Instead, we save for what we want to buy and pay cash.
6. We don't have fines of any sort other than an occasional library book that's misplaced. We take care of those quickly.
7. We pay our bills and pay them on time. Is this really even anything I need to advise people do? Isn't this simply common sense and the "right" thing to do?
8. We check our credit reports -- though not as regularly as we should. I need to make this happen with more frequency.
Overall, having a good credit score isn't really that difficult or take that much effort. In fact, I'd simply consider it a side benefit of managing your finances correctly. If you handle your money well, it's almost guaranteed that you'll have a good credit score IMO.
In regards to checking your credit score... I put it as a repeating task on Outlook. Every 4 months, I check my score for free at annualcreditreport.com. You can get a free report once a year. If you choose just 1 provider each time, you can rotate through one of the 3 providers, Equifax, TransUnion and Experian. It's pretty quick and painless!
Posted by: Elizabeth | June 04, 2009 at 08:33 AM
Checking your score is necessary. When I got my first job out of school I probably checked after 6 months after I had already bought a car. I got 8% financing which at the time I thought was okay. Turns out one of my student loans (ironically the one from the school itself) didn't know I had gone to graduate school for a year. So it was showing up as >180 days deliquent on my report! Even though I had called previously to change my address they had never once sent me a statement or called me to ask about the "late payments". Meanwhile I could have gotten a much lower rate on my car loan.
Posted by: Angie | June 04, 2009 at 08:52 AM
I agree with you Elizabeth. I did the same thing in Google Calendar. Works like a charm because I can never remember when I'm due to get the annual credit report and by spacing them out every 4 months you can maintain a solid checking system. Great advice!
Posted by: Chris Wilson | June 04, 2009 at 09:10 AM
What is going to happen if the "free" credit cards become $100 annual fee cards and then you drop all but the one that you use the most?? How badly will that effect your credit score??
Posted by: Lee | June 04, 2009 at 09:48 AM
I do the same with checking credit reports; I have it scheduled in my calendar every four months.
A caveat in checking your credit: some of the agencies will immediately sign you up for some services when you request your credit report. It's free for a few weeks, but then they hit your credit card for the fee. If the agency asks for a credit card number during the process, then you should stop and read the fine print so you know if they're going to charge you in a couple weeks. Call them up and cancel the service before the free time period elapses.
Posted by: Jeff | June 04, 2009 at 09:56 AM
I don't think "free" credit cards will ever come with annual fees that high. They still have to remain competitive with each together. I was thinking about it recently, about what will happen when the new credit card laws go into effect and there may be no more free rides. If I still have a rewards card giving me a lousy 1% that would still be enough to cover a standard $39 annual fee and still make a little money.
Posted by: Rich | June 04, 2009 at 10:28 AM
@Jeff,
If you use annualcreditreport.com there is no sign up for credit monitoring from them, unlike such scammy sites like the (BOGUS) freecreditreport.com
For more information visit http://www.ftc.gov/freereports
Posted by: JerryB | June 04, 2009 at 10:34 AM
I like this post. Thanks. It helps to make clear something that I've thought for a long time.
MSN and the other "news channels" are advertising for consumerism. It is completely unnecessary to live your life in debt, or to have a negative cash balance - however, it's what pays for MSN (commercials) to exist. If you don't buy beyond your means, the economy can never improve.
It's this type of thinking that has led to the crisis we're in now. We really need to re-think the economy, and stop blindly following fear-based advice posted on television about a vacuous idea such as a "credit score."
Posted by: Josh | June 04, 2009 at 12:13 PM
Update: I just checked mine for the first time in around a year. Still lists my auto loan as in repayment with a balance. I paid that in full in January this year.
Posted by: Angie | June 04, 2009 at 03:59 PM
I've read in at least two sources, that closing credit cards does not negatively impact your credit rating. That in mind, seems like there are two stories being told about the value in holding onto an unused card (ie collecting dust) or outright closing the account.. sounds like MSN would infer that once a CC account is opened you must consistently use the card for the rest of your life.. this doesn't sound very capitalist, given that better CC offers should weed out the 'got ya cards' with phantom fees, dynamic terms and conditions, etc.
Posted by: aaron | June 04, 2009 at 04:58 PM
On your number 3 in "Here's what I've done", you mention having a main card and a backup. My wife and I experienced (a long time ago) having our credit cards stolen (we thought we were being smart leaving her purse in the motor home in the parking lot while we went to Six Flags over Texas). From that experience, we learned that it's a good idea for each of us to carry a credit card that the other does not carry. That way if one of us loses or has credit cards stolen, the other still has a credit card that can be used while the lost or stolen cards are reissued.
Posted by: Harvey J. Poorbaugh | June 04, 2009 at 07:28 PM
This is a good Artical. What I do it I keep one card for monthly recurring charges like my phone and internet etc. And the other one is for pleasure as long as expenditure control is utilized. On My blog I talk about finance related issues like this that could benefit people.
Thanks for the good post.
Posted by: T.Haskett | June 04, 2009 at 08:35 PM
While I agree that you need to check your credit report, I don't agree that you NEED a FICO score. We are on our way to be completely debt free, and have a goal of getting a FICO score of 0. You DON'T need a credit score to get a loan, mortgage, insurance, etc. We do not have a credit card, and have closed 4 accounts. If this is affecting us in a negative way, why do we still get things in the mail asking us to borrow money?
Posted by: Tim | June 04, 2009 at 08:38 PM
There must be 50 ways to wreck your credit...
File a BK, Jay
Default on your loan, Joan
Do a short sale, Dale
Drop off the key, Lee
Posted by: Observer | June 04, 2009 at 09:02 PM
Hmmm, the article says I shouldn't close a card account. I'm thinking about getting the Schwab card but I already have 5 cards, 4 of which I use on a regular basis. Should I close an account or two? Or should I wait until I apply for the Schwab card and then close one or two? I'm not too concerned about my credit score going down a little...
Also, the article also says late payments hurt your credit. It's that only true if you're delinquent (30+ days late)?
Posted by: dj | June 04, 2009 at 10:10 PM
Separate but related. Does anyone have any experience with PRBC.com to build your credit using rent and utlities bills? Will it affect your score that much? I already have several credit cards and loans (~10 total) with spotless payment records for ~2-3 years. I'm wondering if signing up for this would make a difference at all.
Posted by: Angie | June 05, 2009 at 12:42 PM
I would definitely recommend checking your credit rating. myFICO is a decent service among others. If you keep track of your finances through Quicken and download your transactions you should also see any fraud before it is too late to fix.
Posted by: Michael@TheSafeLife | June 07, 2009 at 09:38 AM