Building a Good Credit Score

Physician's Money Digest, June 2007, Volume 14, Issue 6

There's a tactic some people use tohelp manage debt. They continually opennew credit card accounts with the offer of0% interest for 6 months. Then, just beforethe 6 months are up, they transfer thebalance to another new 0% credit cardoffer. The theory is that you'll always have0% interest, thus making your monthlypayment lower. But financial plannerElaine Morgillo cautions about 0% offers.

"If used occasionally, this strategywon't significantly lower your creditscore, but avoid abusing the process,"Morgillo says. "Opening an excessivenumber of credit card accounts will hurtyour credit, as will closing unusedaccounts. Also, if all you do is keep transferringbalances without actually loweringthem, you're only hurting yourself."

Philip X. Tirone, mortgagebroker and author of7 Steps to a 720 CreditScore (Mortgage CapitalAdvisors; 2006), offers thefollowing steps for maximizingyour credit score:

Step 1. Keep your creditcard balances under30% of your credit limits.The debt you carry on acredit card in proportion toyour balance is called a utilizationrate, and credit bureaus respondmore favorably if your utilization rate islow (preferably below 30%).

Step 2. Have at least three revolvingcredit lines. Credit bureaus give higherscores to people with no more and no lessthan three revolving credit cards, whichinclude your typical major credit cards(eg, MasterCard, Visa, Discover, andAmerican Express), but not retail cards(eg, Nordstrom's, JC Penney, etc). Ideally,you should have between three and fivecredit cards.

Step 3. Verify the accuracy of yourreported credit limits. Credit card companiesoften fail to report your credit limitor they report a lower limit than you have.This causes your utilization rate to bereported as higher than it actually is, andit negatively affects your credit score.

Step 4. Have at least one helpfulactive or paid installment loan on yourcredit report. Having an installment loan(eg, usually for a car, but can be for acomputer, household appliance, or furniture)on your credit card is among themost important factors in increasing yourcredit score.

Step 5. Remove certain errors fromyour credit report. Approximately 80% ofall credit reports have at least one error.By removing erroneous information fromyour report, you could see your scorejump 20, 50, or even 70 points.

Step 6. Negotiate for a letter of deletionbefore paying a billthat has been in collectionsfor more than 24months. Accounts thathave been turned over forcollections only nominallyaffect your credit after 4years. Collection notices doremain on your creditreport, but they affect yourcredit score only slightly.However, each time youmake a payment on a bill incollections, the payment will extend for 2years the amount of time the item hurtsyour score. Instead of making paymentson the collection account, which will damageyour score even further, ask that it bedeleted from your credit report in exchangefor payment in full.

Step 7. Create a structured plan toprotect your credit. Your credit reportchanges daily, if not hourly. Once youhave started to build good credit, you willneed a plan for maintaining it, asdescribed in Step 7 of 7 Steps to a 720Credit Score. Otherwise, your good creditcan turn into bad credit.