Money $marts: Getting the best credit scores requires careful spending

GERRY KRAMER

Consumers seem to be getting back in the borrowing game. Coinciding with the advent of the recession and lasting through most of 2010, consumers shed household debt by the billions, paying down and closing credit card accounts, delaying big ticket purchases and curtailing spending in general.

The reversal of that process began in 2011 and currently has accelerated significantly. This past March, consumer borrowing grew at an annualized rate of 10.2 percent — to $2.5 trillion — from February, the biggest monthly increase in a decade. Most of the increase came from car purchases and student loans, but revolving debt, largely credit cards, posted its first monthly increase in three months.

Sensing the change in sentiment (or fueling it), banks are offering more generous rewards to their best customers, those with clean credit histories and high credit scores. Bonus air miles (100,000 at British Airways if you charge $20,000) and cash rebate deals (charge $1,000, get back $150) seem to be the most popular promotions. Tapping into these rewards obviously requires more spending, which ironically could have a negative effect on credit scores. But it doesn’t have to; not if credit use is managed properly.

Achieving and maintaining a top credit score (for example, a FICO score between 780 and 850) requires an understanding of the factors in the scoring model. An important one is payment history. Never being late with a payment, however, is not enough. That will get you a good score, but not in the top tier. Just as important is use of credit compared to the amount available on each account (the debt-to-credit ratio). The model knocks down the score if it’s higher than 30 percent. Spreading out spending so no single account exceeds that usage ratio keeps the score high. The highest scores have outstanding debt below 10 percent of the available line.

The aggregate amount of credit you have available is not an issue. Actually, the scorekeepers prefer more accounts with lots of credit rather than few accounts with high outstanding balances. Having only two credit cards for example may seem fiscally practical and prudent but five accounts (major credit cards are better than single store accounts) managed well is the ticket to score nirvana. Top credit score recipients typically average credit availability at around $75,000, again with less than 10 percent outstanding over time.

Opening and closing credit accounts can affect a score. Too many applications for new lines can raise a red flag that dings the score by as much as 25 points. So don’t be in a hurry to get rewards on cards you don’t have, especially with a “signing” bonus enticement. Separate the opening of new accounts by a few months. Unilaterally closing accounts can also have an impact. Always keep in mind the debt-to-credit ratio. The most benign approach is non-usage with the issuer doing the closing. Also, when closing, keep older accounts in lieu of newer ones. Account longevity is a factor in the score.

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Write to gerryk3001@yahoo.com.

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