Published May 30, 2012
Dear Credit Care,
Help! I'm getting mixed information about having multiple "store" credit cards that have a zero balance most of the time. Over the years I've accumulated cards for various stores to get their deals. I'd like to pay all these off to a $0 balance but am planning to buy a home in a year and need my credit score to go up by at least 50 points. I was told to use these small cards on occasion then pay them right off. Also, what about larger cards -- is it going to hurt my score to pay them off and let them "sit on ice" as they say? I really need help and I feel like I need a Ph.D. to understand the way scores work. Thank you!
Credit scoring can be confusing, but you don't need a doctoral degree to use them to your advantage. Your credit score is based on the information contained in your credit reports available through the three major credit reporting bureaus, Equifax, Experian and TransUnion. To fully understand what can affect your credit score, I recommend you obtain free copies of your credit reports. Visit www.annualcreditreport.com to access your credit reports online, or you can request copies by phone at 877-322-8228.
The first thing I recommend you do when you receive your credit reports is to review them for errors. With billions of pieces of information reported each month to the credit bureaus, mistakes do happen. You do not want to be penalized for someone else's credit missteps that are erroneously reported on your credit report. Dispute any inaccurate information with the credit bureau reporting the error.
While there are many types of credit scores, lenders and other interested parties most often use two source, FICO and VantageScore. You might consider checking with the lender where you hope to secure a mortgage to learn which score they use in their lending decision process.
The widely used FICO score is calculated based on these categories and percentages:
Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
New credit: 10%
Types of credit used: 10%
Your VantageScore is calculated based on these categories and percentages:
Recent credit: 30%
Payment history: 28%
Percentage of credit limit used: 23%
Age and type of credit: 9%
Total of balances: 9%
Available credit: 1%
Each of your credit reports will have a section at the end that explains what actions could be taken to improve your credit score. Review your reports and follow the advice based on the contents of your credit reports to boost your score.
As for your question about balances, in general terms, it is better to have your revolving accounts at a zero balance, than to carry a balance from month to month. It should not hurt your score to pay down your bank credit cards to a zero balance.
Mortgage lenders will review your credit report(s), not just your credit score. You might consider making an appointment with your lender and take copies of your credit reports with you. Request that the lender point out to you any areas that may be of concern. One area may be the amount of credit that you have access to because of the large number of store cards and bank cards that you have open. When granting a large loan like a mortgage, you may be considered a greater risk if you have existing credit accounts that, if used, could amass debt beyond what your income will support. A remedy may be to close some of your revolving accounts.
Handle your credit with care!