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Improving Your Credit Score

I once heard that having too many credit cards is bad for your credit even if you pay them off on time. Is this true? If so, how many do you think it is safe to have? Also, How do you look up your credit score, and what is considered good or bad? Further, What kinds of practices do you recommend for improving your credit score in general? Katherine, New York, New York

In general, having too many credit cards is not a good thing. You have to manage every account and make sure that every bill gets paid on time. There is no real need for a person to have more than three or four credit cards. One might consider getting a Visa, MasterCard and American Express just in case a merchant only accepts one type of card. For example, Costco, the membership warehouse, only accepts American Express at its stores.

Every person that has a credit card also has a credit score. A credit score is what lenders use to determine how risky you are to lend money to.  You can always take a look at your credit score free of charge on the numerous domains offering that service on the internet.  A mortgage company will look at your credit score when determining what interest rate to give you, if they decide to give you a mortgage. If you get an auto loan from your local bank, it too will look at your credit score to determine what interest rate to charge.

The most well-known credit score is called the FICO score. The FICO score range is between 300 and 850 and it gets its name from the company that developed it, the Fair Isaac Corporation. If you want to see your FICO score, you will have to pay for it. You can go to www.myfico.com and sign up to view it. A good FICO score is anything in the high-700s. Consumers with a score in the high 700s will receive the best rates from lenders.

To improve your credit score you should focus on the following two things:

1) Pay bills on time.

This is the one that most people already know. Paying your bills on time shows lenders that you are dependable and trustworthy. Late payments negatively affect your credit score. If you have trouble organizing your bills, you should try using some personal finance software such as Quicken or Microsoft Money. Another way to assist you in paying your bills on time is using a free online service like mint.com, which automatically logs into your financial accounts and gives you reminders when bills are due.

2) Keep the debt to credit ratio in check
The debt to credit ratio measures how much debt one has compared to available credit. For instance, if I have a $15,000 credit line on my American Express card and I have spent $1,500 this month, my debt to credit ratio is 10% ($15,000 divided by $1,500). While the exact methodology for calculating the FICO score is not published, many credit experts say that keeping the debt to credit ratio below 50% is essential for having an excellent credit score. While some people shy away from a high credit limit, actually having one but not using it is beneficial to your credit score.

It is important to maintain a good credit score. However, it is not something to obsess over on a daily basis. Just keep paying your bills on time and monitoring your debt to credit ratio and your credit score should be excellent when it comes time to apply for a loan.

Matt / Google+