How you manage - or mismanage - your credit can help or hurt your credit score.
Your credit score, a numerical rendition of your creditworthiness - or lack thereof - should be at 760 or above if you want the best interest rate, according to FICO, the leading credit scoring system provider.
Creditors, from credit card issuers to personal loan banks, take a hard look at your credit score when you want to borrow with only a signature.
And in today's economy, with lenders jostling to reduce risk, your credit score can take a fast nose dive if you make the wrong move.
Instead of trying to game the system, you should learn what can happen to your credit score, according to FICO, if you:
• Get your credit limit reduced. Expect little, if any impact from one reduction. Creditors generally see a reduced credit limit as somewhat less risky -- unless that reduced limit makes it appear as if you've about tapped out your available credit.
• Close a credit card after a credit hike. This can hurt if you had a large credit line and a low balance because the credit scoring system won't include that much available credit when it considers the total credit you have available.
Consumer Reports advises considering keeping the account open but not using it, especially if its an older account with a good payment record. Closed accounts are eventually dropped from your account and the scoring system.
• Pay down or pay off balances. This is one of the best ways to improve your credit rating - with one caveat.
The scoring system wants to see some credit activity with open accounts. Otherwise you've got what looks like an overwhelming amount of available credit, which can be considered risky. Consumer Reports says pay off balances and close accounts to boost your credit score and qualify for cheaper credit.
• Add a consumer statement to your credit report to explain a ding. There's little impact from this, plus or minus, because lenders pay little attention to statements and the scoring system doesn't see uncoded information.
Consumer Reports says only if you are the victim of identity theft you should place a security freeze on credit reports, contact the police and get in contact with the credit bureaus to remove any fraud-related information.
• Become an 'authorized user' on another credit account. If it's a scam, and there are many such scams, there's no positive benefit. There may be some gain if you are authorized to use your spouse's account and his or her account is better than yours.
• Get a loan that makes payments if you lose your job. This won't drag your score down, but it could boost it a bit or at least keep it aloft. If the cover begins paying benefits the scoring system will continue to see it's paid on time, not that insurance is paying the bill.
Consumer Reports frowns on job-loss protection insurance, but if you do buy it, read the small print before signing on the dotted line. Make sure the coverage you want is what you get.
• Get reported by the public library for not returning a book checked out years ago. No problem. Consumer Reports says you, of course, should always return your library books on time, but the scoring system ignores collection amounts under $100.
