How to Keep a Credit Score High

Question: I recently refinanced my mortgage. Although my credit score is fine, I didn't receive the highest possible score even though I've always paid my bills on time. What goes into calculating the score, and how can I get mine to go up?

Answer: Your credit score serves as a key determinant of the costs of some of the most important and substantial purchases you'll make--like buying a home or car--as well as the interest rates that accompany your credit cards. Damaged credit can affect how much you pay for services such as insurance, and some employers even look to credit histories before extending job offers.

FICO scores (named after Fair Isaac Corporation--the company that developed the methods for calculating the scores) are the most commonly used scores by lenders as they attempt to gauge a borrower's risk and reliability.

Your FICO score actually comprises three scores--one from each of the credit bureaus--TransUnion, Equifax, and Experian. Each score from the individual agencies runs from 300 to 850 points--the higher your score, the lower the risk.

What exactly goes into FICO scores isn't exactly transparent: The bureaus take into account your payment history, of course, but they also factor in how much you owe, length of credit history, and any new credit inquiries. Moreover, different lenders take different approaches to using FICO scores. Mortgage lenders, for example, will most likely look at all three FICO scores when evaluating your creditworthiness, but some automobile lenders will only use one of the three to qualify you for an auto loan. For more information about the ins and outs of FICO scores, click here.

Conducting a Checkup
Whether you're actively in the market for credit or not, it's helpful to know your current credit situation. For starters, every year you can obtain a free credit report from the three major credit bureaus at www.annualcreditreport.com--the only authorized source for consumers to obtain free credit reports. But keep in mind that this site doesn't provide actual FICO scores--you'll have to pay to see those. At www.myfico.com, you can buy two (TransUnion and Equifax) of your three FICO scores for $19.95 each. Note that other sites may provide generic credit scores but those are not the scores that lenders typically use.

As you evaluate your scores, keep in mind that lenders have varying standards when it comes to what constitutes a good credit score. The general rule of thumb is that a credit score above 720 is considered excellent, which puts you in a very good place when securing loans and other types of credit. On the other hand, a score below 620 is considered subpar and will tend to translate to higher interest rates on loans.

Tips for Boosting Your Score
It might seem obvious that the best way to maintain a high credit score is to pay your bills on time. But some aspects of credit scoring are counterintuitive. Here are five tips for raising your score.

Stick With the Majors
Having at least one major credit card, such as Visa or MasterCard, and paying your bills promptly will have a bigger impact than will good behavior with department store and gas cards. At the same time, having too many credit cards can work against you. You might be tempted to overextend your credit, and new credit inquiries, which are typically initiated when you apply for a new card can lower your credit score. Too many inquiries can mean that you're taking on too much debt or are in some financial trouble and need additional credit to get above water.

Limit High Balances
The best way to improve your credit score is to pay down your revolving (or credit card) debt, because having a high balance/credit limit ratio doesn't bode well for your credit score. If you have a card that is close to being maxed out, consider transferring part of the balance to other cards. That's because it's generally better to have smaller balances on a few cards than a big balance just on one. Also keep your charges to 30% or less of a card's limit; 10% is ideal. If you're having trouble sticking to the limits, set up e-mail or text alerts with credit card companies to let you know when you're approaching a limit you've set.

Comb Through Your Credit Report
When you receive your credit report, scrutinize it for any erroneous information, such as improperly reported late payments or accounts that don't belong to you. Also bear in mind that identity theft can swiftly hack away at your credit score. For example, identity thieves can use your card to make purchases and then redirect your bill so that you do not receive your bill in time, or they can deplete bank accounts leaving you with no means of paying the bills. If you do spot something like this, cancel all credit cards and alert your card issuer if you notice any fraudulent activity related to your credit cards. Then, file a police report in the community and a complaint with the Federal Trade Commission. Also call the toll-free fraud number at any one of the three major credit reporting agencies to place a fraud alert on all three of your reports. Doing so will ensure that all potential lenders speak with you directly and require you to answer a series of security questions before authorizing a new line of credit. For more tips on avoiding identity theft, check out this article.

Keep Up Good Habits
If a history of making late payments with a credit card company has adversely affected your credit score, make it a priority to keep paying your bills on time going forward. Delinquencies on payments remain on your credit report for seven years, though some bankruptcies and unpaid tax liens can remain on your record for 15 years. So even though rebuilding your credit history might not be fun, it's possible to undo black marks on your record.

Maintain Old Relationships
Although those in credit-improvement mode might reflexively embark on an account-closing spree, it's usually wise to hang on to your oldest credit card accounts. That's because the length of your credit history is an important factor in your credit score, so closing old accounts can actually hurt your credit rating by making you look like a much newer borrower than you are. Moreover, closing an unused account without paying down your debt increases your utilization ratio, which is the amount of your total debt divided by your total available credit, and that too can be a negative for your credit rating.

Christine Benz contributed to this article.