New to US? Lock down your Credit 101s

A word of caution here: The following scenarios assume that you do not actually need any money, that you can pay your bills on time, and are a financially-sound person.

1. Monitor your credit. This is on how not to monitor your credit. Go directly to a credit bureau and sign up. For example, go to Transunion, Experian or Equifax. I would recommend Score Watch Gold from Equifax (with 2 free credit reports in a year). Even though you can pull in a 3 in 1 credit report (which doesn't count as an enquiry), notice that whichever bureau you use,  you will only be able to see the credit score from the bureau you signed up with. The bureaus don't need to give you a fake credit score from others.

As part of monitoring your credit, you also need to ensure that all the information with all the agencies is accurate. If not, they would help you correct it and it's as simple as clicking a button. Another gotcha; notice the address and information. Whenever you apply for credit, make sure it's always the same. It certainly doesn't look nice on your credit file if you have switched your homes every 3 months (even if you didn't- you probably just gave your home address at the DMV, and just forgot to update your address at the office).

2. Open enough credit lines. Okay, this is something meant for long term, should not be done within a short time-span (though, if you want, it could possibly be applied in that case too). Having enough credit lines, sufficiently healthy (high) lines, and having different types of credit available -- all while maintaining a good credit score is an indication that you are credit-worthy. Yeah, I know - it's a no-brainer, but how do you actually go about doing that?

Well, first you get your score to a level (by just waiting) where you cannot be turned down for credit (usually more than 680). Let's say your sole credit card (say, VISA) is more than a year old now. You check your score with Equifax and realize you won't be turned down. Technically, you could apply for a Citibank Mastercard, an American Express card, a Discover card and any other card within an afternoon, and get them all approved with large enough credit-lines. Here's the secret: all consolidation happens in the late hours, and so, even though you may have signed up for alerts on credit activity and what not, nobody actually knows you made an enquiry until the next day. So, if you had zero enquiries in last one year and you made 2 enquiries today, chances are the lender who makes third enquiry today will see zero enquiries only (your report as it stood yesterday).

Know this though: Yes, you can certainly game the system for that one day. Your credit score, however, will take a nose-dive for the next year. Opening multiple accounts within a short time span carries a huge penalty and not just drops your score, but those enquiries also stay for about 2 years and make your report look bad till then. Of course, if you can live with that, it is a good way to ensure that at the end of two years, not only will your score be very high but you;d also have enough reasons to look good in your report.

 3. Keep multiple enquiries very close to each other. Maybe this is another corollary of point 3. There are times when multiple enquiries are unavoidable for example, when you are car shopping, you might need an enquiry done at Infiniti as well as Lexus dealership. (BTW, never waste an enquiry on pre-approval - You'd always end up with at least two unnecessary enquiries). Of course, if you get them done within one or two days, the credit scoring system recognizes that you were just rate shopping. The same goes true for mortgae enquiries but remember, the time-span for such enquiries is very low (less than a week) and is restricted to those categories (Auto, Mortgage) only.

4. Do use the credit. This one is counter-intuitive. Many lenders do not actually report the credit limit. When a lender such as Capital One or American Express Green does not report your credit limit, the maximum balance ever is used as the highest available credit limit. So unless you have used all of $10,000 limit on a card, there is no way for the bureaus to know that was your credit limit(and your average available credit limit remains low). My advice would be to stay away from such lenders or products simply because it is so selfish of these lenders to report on you when you have a balance but not help you with your credit score. This is also the reason one should stay away from charge cards (or the no pre-set limit cards). There is also a much more important reason to carry a small balance forward once in a while, especially after you clear the balance on any account. For example, lets assume you used up about $5000 on a $6000 limit revolving account. In subsequent months, if you clear your balance to zero, it would be rare to see that balance reflected in your credit report. The reason is simple: the lenders religiously report as long as you owe them money. As soon as you don't, they take their own time to report back (which at times can be delayed more than 6 months). Oh, but swipe just $2 on that card and see the alert pop up and your balance correctly reflected! Retards!

 5. If you paid before 30 days, they do not know.  Credit score is not about having a lot of credit lines and still not having debt. It's more about, having a lot of credit lines, having used all of them in the past and still be debt free. It's about whether you have financial experience or not, whether you can take risks and come out unscathed. Be sensible. Spread major purchases over at least one year periods. Use  the credit lines often enough so that your accounts do not go dormant but utilize very little or pay off in two months period (If you pay off too quickly, nobody ever knew).

1. Never ever sign up for the numerous credit monitoring offers coming your way unless you sign up directly from one of the credit bureaus: Equifax, Transunion or Experian. I'll tell you why. It doesn't matter what they claim, they do not have access to your credit score. For example, if you go and sign up with Citibank/Amex/Chase/.... for their credit monitoring service, even though you are basically authorizing them to check your credit file whenever, wherever they want, they won't really do that. If they did that, they would be paying the credit bureaus more money than they are making off of you. So here is what they'd do. They'd pull a full credit file once and then subscribe on your behalf for alerts on any enquiries from then on. What does this give them? Well, since FICO does publish how they calculate credit scores your score is actually simulated based on the alerts. The aggressiveness and different methods adopted by the three credit bureaus is also accounted for and you are shown a fake score for each credit agency. Huh? And you thought you can get that 3 in 1 report from all the three credit agencies every day for free?  Nope! At best, when you subscribe to such monitoring services, they would probably run a full credit report check every quarter or every six months. In any case, the score you are looking at is a simulated score, not the actual one. It's kind of funny to assume your Experian score is 720 because your lender gave you a simulated score but when you applied for credit, it turned out your score was actually 614 from Transunion. Very likely and very possible.

2. Never sign up for credit monitoring with the same lender who issued you credit. Of course, it sounds so convenient that you'd have one login and you could see everything. However, things can actually get ugly if say, American express issued you a credit card and you also used their Credit Secure monitoring services. First off, see reason 1; it always holds true. More importantly, there is a  reason you see those numerous offers coming through to you from your lender to scare you into thinking that your identity is going to be stolen tomorrow if you don't sign up with them. As your lenders, they can make easy money off of you for monthly, directly debited bills however, that is not the real reason.  As your lender, the credit issuer can make soft inquiries with a certain classification(AM or AR) within a certain time gap. Before you get alarmed, it's not much harm since they don't find out that something is wrong. As your credit provider, they have rough estimates. For example, the score band in which your score lies, the approximate number of lines you have, the approximate balance and available credit etc. However, that information is just sufficient for them (and in your good interest -- if this information itself looks bad, you really are in trouble). The lenders need your authorization to know the exact detail about you by signing up with one of the bureaus where they can make a soft enquiry about you once every three months and also pull a full credit report. The process itself is not much of a harm except that when you do not have a lengthy credit history, you do not have many credit lines, in fact even though there isn't anything negative about you, there isn't anything positive about you either. The result: the lender gets apprehensive and (because they had access to your credit file) cuts short your credit lines. What was given as a $5000 credit limit credit card will suddenly drop to a $500 credit after you sign up for credit monitoring with them. Lowering your credit limit hurts you much more and the lender will forget that it's their action itself that makes your credit report look bad.

3. Never carry a balance more than 30% of any revolving credit accounts (credit cards). In fact, keeping the utilization less than 10% is the ideal and if there are no other significant negatives in your credit history. Another corollary of the same rule; never open a credit account with a lender if you get a very low limit. Even if you have made the enquiry and the lender has communicated to you how much limit you get, if it's too low (relative to your other accounts), just call them up and tell them to get lost. It is important to make sure that your average credit limit and the lowest credit limit are closer together or towards the highest credit limit.

4. Never close a revolving credit account unless it due to reason 3. The reason is, closing your credit account lowers your credit limit but there comes a point as you are building your credit history that an account with lower limit actually hurts you more than just shutting it.  The longer you keep a revolving account open, the higher is your average account age, and the more insulated you are to fluctuations from recent accounts. In the same vein, stay away from small time lenders - Capital-One, for example; you can always call them up before you apply and ask them what is the highest credit limit they give (without giving them the SSN)  for an abnormally high score say 800. I called up Capital-One and they sheepishly agreed it's rarely more than $1000.

5. Do not make more than 2 enquiries in a year. Remember, whoever asks you for an SSN is going to make an enquiry, and whether it's just for a cell-phone or for mortgage, it will stay on your file for 2 years. In the absence of anything else negative, those are what will pull you down.