Credit miscues take time to mend

For years I’ve been trying to manage my credit to achieve the Mount Everest of credit scores – a perfect 850.

I’ve been able to reach the high 700s, but alas, I’ve never reached the mountaintop.

Actually, I don’t really need a perfect score to get the best credit deals. For the most part, any score above 700 (FICO, the score used mostly by lenders, ranges from 300 to 850) will likely qualify me for the best interest rates around. In fact, climbing to the best credit score isn’t about perfection so much as avoiding the pitfalls that will bring your score down.

Recently, I passed out some tips to crack the credit scoring code. That generated even more questions from a slew of readers also in search of better scores. Read and learn:

Question: I co-signed a car loan for my daughter, and she had one late payment. The loan was paid off two years ago. How much does this affect me, and when will it clear?

Answer: This is why I advise against co-signing for people, even your children. When the borrower you’ve co-signed for pays late, that is reported on your credit report as well. That in turn can lower your credit score.

The effect that a single late payment has on the person’s FICO score depends on several things, said Craig Watts, public affairs manager for Fair Isaac Corp., the firm that developed the most popular of the credit scoring models.

Watts said the scoring system considers how late a payment was, how much was owed, how recently it occurred and how many late payments are on a person’s credit report.

So a 60-day late payment lowers your score less than does a 90-day late payment. But recent late payments and the frequency of late payments count, too. For example, a 60-day late payment made just a month ago will lower the score more than a 90-day late payment from five years ago.

The good news is your credit score is in constant motion, so with each passing day, week, month or year, negative information has less impact.

And under federal law, credit bureaus must remove negative records from your credit report after seven years.

Question: I have six credit cards open, and five of them have no balance and I rarely, if ever, use them (four have not been used in the past year). Is it better for my credit score to leave those accounts open and not use them, or to close them?

Answer: It’s better for your score to leave those accounts open. One major factor in your credit score is the longevity of your credit card accounts. Your score gets a boost from accounts that have been open a long time.

Question: I have one (and only one) credit card that has been active for several years (at least six). I use it some months more than others, but always pay the balance in full each month. Over the years, the limit on my available credit has been steadily increased by the issuing bank (not at my request) to $60,000. How is this amount of available credit viewed in terms of its impact on my credit score? Should I write the credit card company and ask them not to increase my credit limit?

Answer: The scoring system Fair Isaac uses doesn’t look at your credit limit in isolation. Getting a higher credit limit could have a neutral effect on your score or a beneficial effect, but it wouldn’t hurt your score, Watts said. The FICO score algorithm looks at your credit limit in relation to whatever balances you may have on your revolving credit accounts. The key in this credit game is to keep your credit utilization very low.

“So if a person has zero balances reported on their revolving accounts, they will have a zero percent credit utilization rate regardless of how high their credit limits are raised,” Watts said.

In practice, this is what Watts means. Suppose you have two credit cards, one with a credit limit of $5,000 and $4,000 in outstanding charges. The second card has a credit limit of $10,000 but no outstanding charges. Your credit utilization on the first card is 80 percent. (That’s not good). Your overall revolving credit usage for both cards is just under 27 percent (much better). Now, if the credit card company raises your limit on the first card to $20,000, the amount of credit you are using drops to 20 percent. The effect of raising the limit also takes your overall utilization to about 13 percent (pretty good).

Depending on your outstanding balances, your score could be helped if a creditor raises your credit limit. The higher limit would lower your credit utilization rate for that particular account and for your accounts collectively, assuming your balances didn’t rise at the same time, Watts said.

By the way, only 13 percent of consumers have FICO scores in the 800s. But in case you’re as obsessed as me with joining that elite club, just know that lenders generally don’t distinguish between people with FICO credit scores of 720 or higher and those with a perfect 850. If you’re in that range, you’ve reached the top of the mountain.

Washington Post Writers Group