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The Three Secrets Behind Your Credit Score

credit score secrets, credit score tips, credit score advice

You already know that your FICO credit score is a big deal: Mortgage, auto and other lenders rely on it to determine if you qualify for a loan and at what interest rate.

You know, too, that late payments can send your score plummeting, and that carrying too much credit-card debt can also damage this key three-digit number.

But there might be three key credit score secrets that you don’t know. And not knowing them? That can put some serious damage on your score.

Good news: Credit scores are climbing

But first, a bit of good news. U.S. consumers today are more in tune with what hurts and helps their FICO credit scores, and that is reflected in the general trend of rising scores.

According to a blog post on the FICO Web site, consumers are, on average, seeing their credit scores rise. FICO reported that in April of 2016, 20.4 percent of U.S. consumers with credit scores had scores of 800 to 850, the best possible scores. An additional 18.5 percent had scores of 750 to 799, while 16.9 percent had scores of 700 to 749.

This was the first time since FICO began tracking score distribution in 2005 that more than 20 percent of consumers with credit scores had scores of 800 or higher.

What’s behind the increase? Probably increased knowledge. There’s a lot written today about credit scores, including about what hurts or helps them.

People are likely more aware of how credit cards work, what is a mortgage, and how to manage their bills effectively.

Not all bills are created equal

For instance, most consumers today know that paying your bills late can send their FICO score lower. But they might not know that paying some bills late won’t hurt their score at all.

Mortgage lenders, auto financing companies, student loan providers and the financial institutions that issue credit cards all report late or missed payments to the three national credit bureaus of Experian, Equifax and TransUnion.

Paying late on these bills will hurt your credit score, often causing it to fall by 100 points or more.

But doctors or your dentist? They don’t report your late payments. Paying these bills late usually won’t result in a hit to your credit score. The same is true of utility, cable and cell phone payments.

Apartment rent is a special case. Most times, landlords won’t report missed, or on-time, rent payments to the credit bureaus. But some landlords have started working with companies that will report rent payment information.

If you’re renting, ask your landlord if your monthly payments are reported.

This doesn’t mean that it’s a good idea pay these bills late or to skip these payments. Your doctor or dentist can send a collection agency after you, for instance. This will be reported to the credit bureaus, and it will send your FICO score crashing.

Late isn’t always late

Don’t panic if you’ve missed your credit card’s due date by two days. No need to panic, either, if you’re late by two weeks or three weeks. It won’t hurt your FICO score.

Lenders and credit-card providers can only report your payment as officially late if you are late by at least 30 days. Only then will these financial institutions send a notice to the bureaus about your late payment. So if you’re a few days late on the mortgage? By all means, pay the bill. But don’t worry about your credit score slipping.

Again, though, the advice to always pay your bills on time still makes sense. You don’t want to face late fees because of a missed payment, even if it’s not late enough to impact your credit score.

Closing that credit-card account is a bad idea

You might be tempted after paying off a credit card to close the account. This way, you won’t be able to run up more debt on that plastic, right?

Unfortunately, closing a credit-card account can hurt your FICO score. That’s because of something called your credit utilization ratio.

Part of your credit score is based on how much of your available credit you are using. The more you use, the bigger the negative impact on your FICO score.

Closing a credit-card account, especially one with a negative balance, automatically increases the amount of available credit you are using.

Consider this example: Say you have four credit cards with a total credit limit of $30,000. Say you owe a total of $5,000 on these cards. You are now using a bit more than 16 percent of your total available credit. If you close one of your credit-card accounts with a credit limit of $8,000, you still have $5,000 worth of credit-card debt, but you only have $22,000 of available credit.

This means that you are now using a bit more than 22 percent of your available credit, a higher credit-utilization ratio and a bigger hit on your FICO score.

So even if you pay off a credit-card account, don’t close it, not if you want to keep your FICO score as high as possible.

About The Author

Dan Rafter is a freelance writer with more than 20 years of experience covering financial topics. He has written for the Chicago Tribune, Wise Bread, Washington Post, Consumers Digest, and several other publications.

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