Learn how to protect credit scores...
After working hard to increase your credit scores, you want to make sure you know how to keep them.
The FICO scoring model can be tricky, so you need to be aware of how certain actions may affect your credit scores.
For example, you may think that closing a credit card account would increase your credit scores; not necessarily so!
Take a look at these tips to protect credit scores:
1. Don’t close your credit card accounts.
You may be tempted to close your credit card account because your credit card provider sends you a notice of an increase in your interest rate. Don’t close the credit card account. Closing the credit card account could negatively affect your FICO credit scores for at least two reasons.
First, it will reduce your available credit limits causing your debt to credit ratio to increase. This represents 35% of your FICO score. Secondly, your closed credit card account will eventually be dropped from your credit report and if it happened to be your oldest account, you will lose points because the FICO Scoring model will no longer consider the longevity of the dropped account.
Instead of closing your credit card account, you may want to use it very sparingly, or cut it up and just stop incurring any additional charges.
2. Don’t payoff your credit card balances.
While completely paying off your credit card balances may be the best strategy to get out of debt, surprisingly, it may not be the best strategy to protect your credit scores.
Unfortunately, the FICO credit scoring model considers a zero balance undesirable. This is the case for obvious reasons. The creditors make money by charging interest. They want you to keep a modest balance and pay on time.
Maintaining a balance of 20% to 30% of your credit limit is necessary to protect your credit scores.
3. A mortgage modification or short sale may reduce your credit scores.
If you enter into a loan modification agreement, your lender basically agrees to accept a lower amount from you than the amount you originally committed to repay. Depending on how your lender reports this transaction, it could reduce your credit scores.
For example, if your lender reports it as “paid as agreed” it may not affect your credit scores. However, if the lender reports your mortgage modification agreement as “paid less than full amount” or “partial payment” or something else indicating payment of something different than what was agreed, it may substantially reduce your credit scores.
If you have to enter into a mortgage modification or short sale, try to get your lender to agree to report the account as “paid as agreed” prior to entering into the agreement.
4. Avoid multiple credit inquiries.
When applying for new credit, multiple credit inquiries can reduce your credit scores. However, credit inquiries usually impact your credit scores minimally; maybe 5 to 10 points.
One way to limit the number of inquiries is to shop for new credit with multiple lenders within 14 to 30 days. The FICO scoring model considers multiple credit applications for cars or mortgages within this time window as only one inquiry.
Also, you may want to make such applications in person and try to get the lender to tell you their loan qualifications in advance to see if you would qualify before applying.
5. Make timely payments on your credit accounts.
This may seem obvious, but just make sure you send your payments to your creditors in time to get posted before the 30 window for reporting of late payments to the credit reporting agencies. Some creditors may not post your payment to your account for 2 to 3 days after receipt of your payment.
So if you’re cutting it close and make a payment on the 27th day of the month and it takes 3 days to post to your account, it may get reported as 30 days late, when actually it was only 27 days late.
6. Protect your credit information and avoid identity theft.
One of the best ways to protect credit scores is to guard your credit information and avoid being a victim to identify theft. You may be surprised to learn who you need to protect your credit information from. Many times it’s someone you know!
It may also be a good idea to sign up for a credit monitoring service. Such services can provide you with an alert whenever your credit is checked and you can review your credit reports and regularly to protect credit scores.
Also, learn what to do if you should become a victim of identity theft.