The credit reporting agencies don't know how much money you make or how big your savings are. They don't know the rent you're paying. So, the scoring companies can't judge your ability to carry your current debt.
They do look at the amount you owe, and at how much of your available credit you are using. The smaller the debt the better. For instance, if you have a $10,000 maximum limit on your credit cards, and you owe $1,000, that's okay. A $9,900 debt would be awful. FICO likes to see debt at 30 percent or less of available credit, says spokesman Anthony Sprauve.
If you can't pay down the debt, call the credit card company and ask for a higher credit limit, DeMare says. A bigger limit makes your debt percentage smaller.
Shuffling debt around can also help. Suppose you have two credit cards with $10,000 limits, with $9,000 owed on one and nothing on the other. Moving half the debt to the unused card will help, he says, and the FICO spokesman agrees. The formula judges you on how close you are to maxing out a card.
Not all credit cards report your maximum credit limit to the credit agencies, and that's a problem. It makes your debt percentage look bigger than it is.
That happened to someone in DeMare's office. "Sure enough, Citibank wasn't reporting his credit limit," DeMare says. "He got it fixed and his score jumped 40 points."
Debts sent to debt collectors are poison for a credit score. If they're new debts, try to pay them off. But the older a "collection item" gets, the less it counts, and they disappear after seven years. So, if the debt is very old, you're better off not paying it. A payment turns it fresh again in the scoring system, DeMare says.
One client suffered because he was an "authorized user" on another person's credit card, something common in families, and that person was behind in payments. The client called the credit card company and had his name removed.
If you're divorced, better divorce your debts, too. If you're on your ex's credit cards, any payment problems will show up on your credit report. "We see that happen a lot," DeMare says. "I recommend that you close the accounts."
Some people are dinged for being too responsible with their money. They hardly ever use credit, preferring cash. "You'll have a harder time getting credit than the guy who has debt," DeMare says.
Actually, debt isn't necessary. If you simply pay off a credit card in full every month, you'll establish good credit.
A short credit history also hurts. As a result, some young and frugal people have trouble getting mortgages, DeMare says. That's why he recommends that college-age young people get credit cards. Young people under 21 need a co-signer, generally a parent, to get a card unless they have a sufficient income.
Can't trust your irresponsible kid with plastic? DeMare recommends that parents start them out with a "secured" credit card. Parents deposit money with the credit card company -- often a few hundred dollars -- and the kid can't go over the limit.
That establishes credit without danger of debt. But FICO adds a caveat: Some issuers don't report secured credit cards results to the credit bureaus, which defeats the purpose.
If you're shopping for a loan, do it quickly. Many credit checks from lenders raise worry that you're about to go on a borrowing binge. But if the inquiries arrive quickly, the scorers think you're shopping for a single loan.
If you have a short history, don't open a bunch of new credit accounts in a hurry. That behavior hurts the scores of young people more than people with established credit, according to FICO.
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