Managing your credit rating can be a surprisingly difficult proposition. That’s partly due to the nature of how a credit rating is calculated. The credit reporting agencies—who pass judgment on who is a good credit risk and who lenders should work with—keep the formula used to set credit ratings a secret.
However, there are certain factors that clearly raise or lower a credit score, though some of those factors may be surprising. It’s important to pay off credit accounts on time (if not early), but beyond that obvious option, it’s important to consider how your other choices impact your credit.
Closing Credit Accounts Causes Problems
It’s counter-intuitive, but closing your credit card accounts can seriously lower your credit rating. While closing an account can be good for your peace of mind, your credit score is based, in part, on the ratio between how much credit you have access to and how much you’re actually using. Closing accounts reduces that ratio.
As Adam Levin, the CEO of Credit.com, explained for MSN’s The Biggest Credit Mistake You Can Make, you should limit closing accounts to those situations where you specifically need to. “If a card is used fraudulently and your bank doesn’t cancel the card and issue a replacement, you should definitely close it immediately,” explains Levin. “If your relationship is breaking up, and you share a joint credit card with your partner, close the account…If you never use a card that charges a high annual fee, closing it might make sense—but think about it first. There are other examples, but the general rule of thumb is: keep those accounts open.”
Considering a Better Credit Ratio
Because the ratio of available credit can be a major factor in calculating your credit rating, having more credit available is beneficial. Provided that you’re current with your bills, you may be able to widen that ratio just by asking. Levin notes that simply asking for a higher credit limit on the cards you already have can improve your credit ratio. However, he does suggest taking some care: “…Be careful, as this may generate a hard inquiry. You can ask the credit card company rep if this is their practice.”
Of course, to maintain a high ratio between the credit you have available and what you’re actually using, you need to avoid using that newly raised limit. It’s just a question of keeping it available.
Checking Your Credit Report Should Be Required
Your credit history may be causing you more damage than you think — especially if you don’t check it regularly. According to a recent survey on FindLaw.com, a quarter of Americans have found problems on their credit report, though that number doesn’t take into account how many people don’t check their report in the first place.
Problems can range from outdated credit history to mixups between people with similar names, or even identity theft. Credit reporting agencies don’t have much of an obligation to fix your credit report until you point out an error, making it crucial that you check your credit report regularly. By law, credit reporting agencies must provide you a free copy upon request, once every year.