Beware of Black Friday.
That’s the day after Thanksgiving when shoppers descend on malls for some serious holiday bargains. There they are bombarded by merchants with offers of discounts in exchange for signing up for that retailer’s credit card.
How you respond to offers can impact your credit score, says John Ulzheimer, president of consumer education for Credit.com.
That makes this season one of the most important for safeguarding and improving your credit score.
Those steps also serve as reminders of year-round dos and don’ts for boosting your credit-worthiness.
Ā Succumbing to offers of additional plastic can be bad for your credit health. Each card application triggers a request for your credit report. And in the formulas used to calculate your credit score, excessive inquires hurt your score.
The formulas sometimes assume people apply for credit because they can’t afford to pay cash or write a check. It’s a Catch-22. Retailers want you to take their cards. Lenders worry about your ability to pay.
Lenders cut you slack for certain types of inquiries.
“They don’t mind if multiple requests for your credit report come from lenders of car loans, home equity loans and mortgages within 30 to 60 days,” said Kenneth Lin, founder and chief executive of Creditkarma.com. “They recognize that as shopping for a loan, not as taking multiple loans. Those count as a single inquiry.”
The number of inquiries stays on your report for 24 months, Ulzheimer says. Excessive inquiries for personal loans and credit cards hurt your score for 12 months.
Reducing inquiries below the excessive level heals this part of your credit score in stages, he adds.
“If you expect to need credit for a major purchase such as buying a home within a year, avoid applying for more than one credit card in the meantime,” Ulzheimer said.
Ā The amount of debt you carry also impacts your score.
“The higher the ratio of your account balance to your credit limit, the more it hurts,” Ulzheimer said. Keep that ratio as low as you can.
Aim to keep your ratio at 10% or less, he adds.
One good tack for limiting balances is to pay your credit card bill online before the end of your statement period.
“You’re giving up your grace period,” Ulzheimer said. “But if you’re looking for a way to boost your score, this is an excellent way to keep your balances at or near zero and your utilization ratio low.”
Another step: Especially if you have more than one card, stop using as many as possible in the months before you apply for a big loan. Those zero balances will boost your score.
Oh, and don’t try to lower your utilization ratio by asking your card issuer to boost your limit.
“Many issuers see that as a sign you’re having trouble,” Ulzheimer said. “Many will close your account.”
Ā When you need to get a loan or credit card, try to get a type you have not had before.
“Diversity of accounts helps your score,” Ulzheimer said.
One common type is revolving credit, which is what most credit cards, home equity loans and lines of credit are.
Installment loans involve fixed payments for a set period. This is the category that applies to mortgages, car loans and personal loans.
Open credit accounts are a third type. These involve balances that must be paid in full at the end of the month. Traditional American Express cards fall into this group.
Ā The major no-nos need little explanation. Delinquencies, bankruptcies, judgments, tax liens, collections, charge-offs, late payments, repossessions, foreclosures, settlements and short sales all hurt your score. They stay on your report for seven to 10 years.
You can get your report for free from each of the three major credit bureaus once a year. If you stagger your requests four months apart, you can get three reports a year for free at equal intervals.
If you spot something that you think is incorrect, you can request an explanation and you can dispute it. Always do this in writing. Be prepared to document your case.
The most common error is a credit account wrongly attributed to you.
Finding Freebies
The bureaus Ā Equifax, Experian and TransUnion Ā are not required to provide free copies of your credit score. But you can get a freebie at some third-party Web sites such as Creditkarma.com.
“We make our money from advertising, so we pay the cost of the score,” Lin said.
The three bureaus use the FICO scoring model. Your scores should match except when the bureaus use information about different accounts or transactions. Your best shot at the best terms for a loan requires a score of at least 720 to 750.
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