Chicago, IL - The first installment of this series, How to Understand and Make the Most Of Your Credit Scores , gave an overview of how credit works and how your credit affects your ability to qualify for a mortgage. The second installment  covered Fico scores, one of the biggest factors in qualifying for a loan. This installment will go over some tips on how to manage your credit and raise your overall scores.

Your Fico score is broken down into 5 major categories, and each of these has up to 100 different factors that make up your over all credit score. To make it more confusing, the actual formula that goes into the credit scoring system is a trade secret, and it changes regularly based on loan performance. With all the changes in the mortgage market you can be sure that it is being tweaked regularly, and tightening up in ways we don’t know about yet.

There have been all sorts of schemes for raising your Fico scores. Some were barely legal but widely used. One of these was the practice of being put on someone else’s credit card as an authorized user - in effect, borrowing their good credit to raise your score. There were people who made thousands of dollars per month by allowing people with poor credit to use their credit history (but not letting them actually use the credit cards). It took a while, but Fico figured out this scheme and it no longer works.

Still, there are some ways you can use your credit that are proven to increase your Fico score and build a better credit rating.

 Top 10 Ways You Can Use Credit effectively and Raise Your Fico Score:

1. 1. This probably goes without saying, but the biggest thing you can do to improve your credit is to pay your bills on time. If you’ve have had problems, you need to get your accounts current and keep them current. Recent history matters most, so time will work wonders toward improving your Fico score and credit profile.
2. 2. Monitor each of your accounts, and make sure you keep your credit card balances well below your credit limit. Your Fico score will improve if you drop your balance below 50% of your max credit limit, and it will improve again when you are below 30%. If you are over your credit limit it can kill your score because not only do you have a high balance, but you are now in technical default.
3. If you have mistakes or inaccuracies in your report, dispute them. You can work with your creditor and try to get them to fix what they are reporting, or you can go directly to the repositories and contest the items with them. (I’ll cover how to do this later.)
4. Credit scoring systems want to see that you use credit regularly, but use it wisely. You will get more value for using credit cards monthly and paying them off at the end of the month then you will if you have credit lines which you never touch.
5. Closing unused credit cards won’t increase your score. If you are planning on taking out a mortgage soon, and you want the most benefit, keep those old lines open.  In the short term closing accounts takes away their history and reduces your total available credit limit and it can actually make your score drop. (On the other hand, closing accounts might make a lot of sense from a security and financial planning standpoint. But don’t do it if you are planning to apply for a loan soon.)
6. Don’t accept pre-approved offers you get in the mail. If you are like me, you could fill a recycling bin with letters from lenders saying you have been pre-approved for financing. They say you are pre-approved, but if you apply the first thing they will do is run your credit report.
7. Only apply for new credit when you actually need it, and you know you can afford it. Requesting new credit (inquiries) will lower your Fico score more if your credit isn’t so hot to start with than it will if your credit is stellar.
8. Make sure you don’t open a lot of accounts too quickly. New accounts will lower your average account age, and this can hurt your score.
9. If you’ve had a bankruptcy or credit problems in the past, you will need to re-establish your credit history. You may need to start with a pledged account, that is, a credit line with a credit limit fixed to the amount you have on deposit with the bank. Over time you will be able to get more credit offers. It can be hard to reestablish credit, but opening new accounts and paying them off on time will help you in the long term.
10. If you have old collection accounts on your report, don’t pay them off until you consult with your loan officer. If a collection is old it may not be a big factor in your score. When you pay it off it shows new activity on that bad account and can lower your score temporarily. The underwriter may require that you pay off the collection before closing, but doing it then will not affect your approval.

The key to good credit is to not take on more debt than you can handle. Being aware of your credit use and making sure you use credit responsibly goes a long way toward increasing your Fico scores and putting yourself in a great position. But what happens if you have mistakes in your past that are holding you back now? We will cover that in the next post.

The other parts of this series are:

How To Understand and Make the Most of Your Credit –Part 1 - An overview of credit.

How To Understand and Make the Most of Your Credit –Part 2 - What makes up your Fico score.

How To Understand and Make the Most of Your Credit - Part 4 - Fixing Mistakes and Credit Repair

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