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For the past two years my father helped me establish some credit with a car loan. A month and half ago I applied for another one, transferring the existing loan to my sister. At that time I discovered that my credit score was 721, which qualified me for 5.5% interest on my new loan with a 3-year term at my local credit union.

About two weeks ago I decided to also take the opportunity to get a credit card from the credit union at a rate of 7.9%, and I've started to realize that apart from paying/not paying on time, I have very little idea about what affects my credit score and/or my credit limit.

I've heard that canceling a credit card, as opposed to letting it expire can be a black mark on your credit report. Is this true? What other pitfalls should I avoid?

I'm planning on using my new credit card the same way I've been using my debit card - would a lot of little purchases be better or worse than a few large ones (as most people tend to do)? What sort of usage patters should I avoid?

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I have a problem with your premise: Credit ain't a game. – Dan Oct 15 at 15:43
@Dan: I absolutely agree. I was trying to refer more to the arbitrary rules and hidden traps in the credit rating system than implying that the credit system isn't serious or meaningful. – Kyle Cronin Oct 15 at 23:45

2 Answers

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Your FICO or credit score is roughly based on five categories:

  • Payment history – 35%
  • Amounts owed – 30%
  • Length of credit history – 15%
  • New credit searches – 10%
  • Types of credit – 10%

Payment History: 35% of your score is determined by how punctual you are with your payments. As you already know, always pay your credit card/bills on time. This is big.

Amounts Owed: 30% of your score comes from the ratio of your credit card balance to your credit limits. This is why you shouldn't max out your credit cards, and why having higher limits on your cards with smaller balances will help your score.

Length of credit history: 15%, if you don't have any other credit sources older than 7 years, never cancel your oldest card. Hang on to them and put them in an ice block in the freezer if you no longer want to use them.

New Credit: 10%, Recent searches for credit, and credit report checks can have a negative effect on your score as well.

Types of credit used: 10% of your score also comes from the types of credit you use. If you have several different sources of revolving credit you can be seen as a credit risk because of your ability to rack up debt quickly.

I don't think it matters whether you use your card for a lot of small purchases or a few large ones, again the main determinant here is your ratio of your credit card balance to your maximum credit limit.

In general you want this ratio to be as low as possible, ideally having a $0 balance with the highest limit you can get (however, this limit shouldn't exceed 20-30% of your gross income).

Money magazine says here:

The best way to improve your credit score is to pay bills on time and to borrow no more than 30% of your available credit.

I'm not sure how valid that number as credit scoring agencies only give us generalities of how scores are calculated but it's probably a good number to go by.

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Thanks for the info! Is it possible to provide some numbers? For example, what's a good ratio of balance to limit? I have a rather low credit limit on the card, and I'm wondering if perhaps it's not a good idea to put all my spending on the card (as I previously planned). – Kyle Cronin Oct 14 at 22:18
I've updated the post to give a little more information. Thanks for participating! – sefner♦ Oct 14 at 22:50
@Kyle: Good ratio? I would suggest having NO money on credit cards. "The best debt to have is no debt", I say. Why? It's simple: Risk. Your risk is very low when you pay for purchases with cash. Your risk is high if you're bankrolling your purchases on credit. – Dan Oct 15 at 15:42
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Credit.com

This site will take some personal information (it has to) and give you a credit score with lots of detailed info from one of the credit bureaus. So you can get a pretty good idea what your score is, and how it is calculated.

All bureaus are a little different, but the generalized tips and explanations they put on this site hold true for the entire credit score concept.

I did this, and so far nobody called me, no excessive emails and I keep a regular eye on my accounts and no fraud. It seems scary to pop your SSN into a website, but this one seems legit.

Here is the article that I read that pointed me to the credit.com site.

Also, and this cannot be stressed enough: If you can't pay your balance every month in full, cut up the credit card.

Do not descend into debt to build up your credit score. I think that is a myth, have credit, use it if you like (I use my card for almost all purchases) but pay that sucker off. I am personally finding myself in a bit of a hole because I have used credit to pay for some emergency purchases (home heating system that died and some medical bills) and I can't catch up.

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Yep I've used this as well only because I saw it on getrichslowly so I was pretty sure it wasn't a scam. It was quick and worked exactly as advertised and surprisingly I haven't received any spam as a result. Thanks for the reminder. – sefner♦ Oct 14 at 19:50
Thanks for the tip on the site! – Kyle Cronin Oct 14 at 21:20

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