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**BettorsChat** · 01-26-2005, 03:54 PM

Unlocking the black box
Ten surprising tips for improving your credit score

By Andrea Coombes, CBS.MarketWatch.com
Last Update: 11:51 AM ET Nov. 9, 2004
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SAN FRANCISCO (CBS.MW) -- Given that credit scoring is based on proprietary statistical models, there's little hope that consumers will ever fully understand why they've been allocated one score over another.

While light is increasingly being shed on how the system works, much of it remains a mystery. "It's far too complex and confusing for consumers. It's just very, very difficult to know what you should do," said Gerri Detweiler, author of The Ultimate Credit Handbook and founder of DebtConsolidationRx.com.

"Part of the problem is there's just so much information being put into and coming out of credit reports. It's getting harder than ever to stay on top of it, but if you don't you end up really paying the price," she said.

A steep price: A consumer scoring 600 pays about $300 more a month on a $150,000 mortgage, or almost $108,000 over the life of a 30-year fixed-rate mortgage versus someone logging an 800, according to the MyFico.com calculator.

And people with high scores can be hit the hardest. "The irony is, the higher your score, the farther you can fall," said Craig Watts, spokesman at Fair Isaac, creator of the FICO score.

One late payment could push an 800 down to 640. When someone with an 800 "stumbles for the first time it puts them in such a different pool of consumers their credit risk increases hugely," Watts said.

That consumer is "much more likely to run into problems than they were before they encountered that single (late) payment. In order to reflect that change in their risk, the score drops precipitously," he said.

Given the degree to which scores affect your financial life, consider the following ways to push your score higher. Some may even surprise you:

1. Ensure lenders are reporting your credit-card limits

A chunk of your score is based on revolving debt outstanding compared with the total amount of credit available, or your debt-to-credit-limit ratio. If your debt nudges up against your credit limit, your score will fall.

But some creditors withhold credit limits to tarnish customers' credit histories, making them less appealing to competitors.

"If a lender doesn't report your credit limit, you look a little bit worse to any other creditor, and you're less likely to get (competing) offers," said Brad Scriber, credit-scoring expert at the Consumer Federation of America.

"Credit-card companies benefit by protecting their customer base, and consumers are left to pay higher prices for a wide range of services," he said. "Complain to your credit card company. Tell them you don't like their gaming the system to hurt your credit score."

2. Pay down a home-equity line of credit

Home-equity lines of credit are considered revolving credit, Detweiler said. One client raised his credit score by 60 points by paying down his $50,000 equity line. "It was having quite an impact," she said.

3. Request good credit history on your report

Often, student loans and other debt aren't reported to all three agencies, potentially reducing your score.

"Ask your lender to report it, or you can write to the credit bureau directly. 'I have this account. Please add this to my credit file,'" said Lynnette Khalfani, author of "Zero Debt: The Ultimate Guide to Financial Freedom."

"The disputes don't always have to be removing information. The dispute can be 'I have this student loan and I paid it and I want that shown on my credit report.'"

4. Be wary about moving to a new 'credit scorecard'

You'd think a bankruptcy filing dropping off your credit report after the requisite 10 years would push your score up. That's what one of Detweiler's customers thought. Instead, she said, "it went down about 10 points."

Said Watts, of Fair Isaac: "This can happen. It can be a rather unpleasant bump."

Risk models put borrowers into different groups to compare them. The FICO score model has 10 groups. With a bankruptcy filing on his report, Detweiler's client was grouped with others with similar filings, but his single negative entry made him look less risky than others in the group with worse credit histories.

Once the filing aged away, he was moved to the pool of people without bankruptcy filings, where his skimpy credit history looked worse, pushing his score down.

5. Ask about the date of last activity

A creditor may report your payment of an old debt as new account activity, harming your score because new actions are weighed more heavily than older transactions. Your effort to take care of long overdue accounts may push old, negative information to the forefront of your credit report.

A five-year-old debt "doesn't hurt your credit score as much," said Evan Hendricks, author of "Credit Scores & Credit Reports: How the System Really Works, What You Can Do."

"If you pay off that five-year-old debt and they change the day of last activity to the day you paid it, then this five-year-old collection becomes a new collection," he said. Ask creditors and credit bureaus to refrain from updating the date for old debt.

Fair Isaac is working to change the practice. "We've been working with the credit bureaus to help them understand the problem and persuade them to change the way they're recording these activity dates," Watts said. "We've had a lot of success ... two out of three bureaus do it this way now."

6. Remove duplicate data

There's a reason consumer advocates repeat their "check your credit report" mantra: Oddities and errors occur. For instance, a lender may sell a loan but it appears on your report under the original and new lenders' names.

"It makes it look like you've got two, three, four times as many loans out as you do," Hendricks said. "You want to watch out to make sure only the correct number ... are being reported on your credit report." See Ray Martin's advice on credit-report errors.

7. Consider credit re-scoring through a mortgage lender

Those shopping for a mortgage might ask for a credit re-scoring to get negative information off your report quickly.

"You can go to a lender who will submit your documentation to one of the big three credit bureaus," Khalfani said.

"All of the credit bureaus have special departments set up to deal with those kinds of requests on an expedited basis. After they receive proper proof that there's been a mistake and update your credit file, most times it raises your FICO score," she said.

This process is a quick means of dealing with tax liens or collection accounts that erroneously show up as unpaid, as long as you have official documentation and are applying for a mortgage.

8. Don't close old accounts

Closing an old account in good standing could harm your score by shortening your credit history. "What you've done is decreased your average account age. This is another one of the factors that goes into determining your credit score," Khalfani said.

Closing that account also reduces your available credit, making your debt-to-limit ratio higher, thus negatively affecting your credit score.

Plus, there's no guarantee the closed account will disappear. "It will stay on your report as long as the credit bureau wants to keep it there," Watts said.

Others say it's OK to close accounts, but avoid closing those with the longest history. "Part of what they're looking at is the length of the history ... close the more recent ones before you close the older ones," said Deborah McNaughton, president of Professional Credit Counselors and author of "The Get Out of Debt Kit: Your Road Map to Financial Freedom"

9. Keep revolving-account balances low

Along with paying bills on time and catching up on past-due accounts, keep your account balances low, and don't open a slew of credit lines. "So many people get hit because they have too-high balances to their credit limit," McNaughton said, adding that keeping balances at 30 percent of your credit limit will help your score.

The FICO score measures balances on individual cards as well as total debt outstanding. But should a consumer run up three cards to moderate levels, rather than maxing out just one? "Perhaps, depending on what else is on her credit report and how soon she pays off the debt," Watts said. His rule for a better FICO score: "Keep balances low when possible and pay down any high balances."

10. Don't open too many credit lines

McNaughton recommends no more than three or four open credit lines. But credit scoring is never that simple. Here's Watts:

"Say you and your friend both have been managing credit for just one year and the only difference in your credit reports is you have six accounts and he has three. It's likely your higher number of accounts will pull your score down relative to his score because people who open a lot of credit lines very early in their credit lives are statistically more likely to have credit problems in the next 24 months."

But 30 years later, and both of you perfect, on-time bill payers?

"Now your six accounts could improve your score compared with your friend's score, because statistically your mastery of six accounts makes you a better credit risk than someone who has successfully managed just three accounts over 30 years," Watts said.

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