Perfect score: taking the mystery out of building A-1 credit

Black Enterprise, Nov, 2004 by Sakina P. Spruell

Waterson and Ndiaye have managed to have at least one of each. Both have four revolving credit cards. Waterson has an auto loan and a mortgage, and Ndiaye has only a mortgage. By design, Ndiaye decided not to take out an auto loan but saved to purchase a new car with cash. This didn't affect her credit however because she still had a healthy mix. "It's not good to see 20 open credit cards and no home or auto loans," warns Sjoblad.

30% ACCOUNT BALANCES

Holland of Equifax says, "You can pay your minimum payments every month and still have a low score because you have high balances." Sjoblad concedes, "FICO likes to see that people are using a low amount of their credit limit."

This rule works just fine for Ndiaye, who pays off all major debts before acquiring new debt. "I paid off my undergraduate loans in two years before I went to graduate school," she remembers. "My graduate school loan was a 10-year loan for $15,000, and I paid it off in five years," says the University of Chicago alumna.

Yet some say it's best to leave a small balance on your revolving credit card debt. But Stephen Snyder, author of Do You Make These 38 Mistakes With Your Credit? (Bellwether Inc.; $295) says "the truth of the matter is you will get the highest FICO score if you pay off the entire balance each month."

Snyder offers this tip to those who can't afford to pay off the entire balance: "A way to make the most impact fast is simply by increasing your credit limits. Say you nave a $1,000-limit Visa card and you [spend] half of it each month. if you raise that limit to say $2,000 and you still only use $500 a month, the ratio of how much you [owe] each month [versus your credit limit] goes down substantially; therefore, your scores will increase."

15% LENGTH OF TIME WITH CREDIT

"Someone who has used their credit responsibly for 20 years, versus someone just out of college, is going to have a greater benefit from the length of their credit history," explains Sjoblad. Waterson started thinking about credit 13 years ago when she got her first credit card. Ndiaye on the other hand has had a responsible credit history for 20 years, which undoubtedly accounts for the additional 100 to 140 points she has over Waterson's credit score.

"Don't close accounts," Snyder advises. "When you do, it lowers your scores." First, if you close unused accounts, your total credit card limit may immediately be maxed out because you would be using 100% of your revolving credit. However, by keeping the account open, you may only be using 50% of your credit card limit. Second, it shortens your credit history.

10% INQUIRING %CREDIT

"Anytime you take out new credit, it's a short term drop in your score," says Sjoblad. Likewise, every time someone gives permission to a lender to pull his or her credit report, the score also drops.

"If you shop for a mortgage or auto loan at five different places within 14 days, it will only count as one inquiry and it won't show up for 30 days," says Sjoblad, adding that he would be surprised if it was a demerit of more than 10 points for one inquiry.