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| Beef up your credit score in 5 steps - Page 2 of 2 3. Don’t close old, paid-off accounts. We used to tell people to close accounts they weren’t using. Now here’s the word from Craig Watts of Fair Isaac’s consumer affairs office: “Closing accounts can never help your score, and often it can hurt.” This knowledge is frustrating to those who want to simplify their lives and reduce the opportunities for identity theft by closing unused accounts. But credit facts are credit facts. Shutting down credit accounts lowers the total credit available to you and makes any balances you have loom larger in credit score calculations. If you close your oldest accounts, it can actually shorten the length of your reported credit history and make you seem less credit-worthy. Of course, perhaps you can afford not to care too much about the effect of closing an account. If you don’t use cards much and your score is already high, the damage caused by shutting down more recent unused account will be minimal and may be well worth the peace of mind. If you do carry balances or charge a lot, however, leave all your old accounts open, especially if you’re about to apply for new credit.
4. Don’t be afraid of credit counseling. If you’re overloaded with high-interest debt and are in danger of falling behind on your payments – or you already have – consider working with a non-profit agency to set up a debt repayment plan. These services can negotiate lower interest rates and help you pay off your bills within a few years. Contrary to what you might have heard, credit counseling probably won’t hurt your credit score. It used to, but about three years ago Fair Isaac discovered that people in debt repayment plans were no more likely to default or go bankrupt than other consumers. Today the FICO score ignores any and all references in credit reports to credit counseling or debt management programs. Those references to credit counseling, by the way, are typically removed from a credit report after a consumer has successfully completed a repayment plan. That means there’s no lasting reminder on your credit history. A few lenders still use the old scoring system, which punishes folks on debt repayment plans. Obviously, you’ll want to avoid those lenders – and perhaps all lenders until you’ve dug your way out of credit trouble.
5. Stay out of bankruptcy if you can. Bankruptcy is the nuclear bomb of the credit world – worse than delinquencies, loans or collections. Its impact, however, depends on how many black marks you made on your credit before you filed. Bankruptcy can knock 200 points, or more, off the score of someone with otherwise good credit. People with multiple delinquencies or collections on their reports will see less decline because their scores are low to begin with. Either way, recovering from bankruptcy can be tough. Once a score is pushed below 620, which bankruptcy inevitably does, credit becomes scarce and far more expensive. |
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