Protect Your Credit Score

Forget winning Mom and Dad's approval -- winning a bank's good opinion is becoming a twentysomething's true challenge.
The same credit woes that are contributing to stock-market volatility and problems in the housing market are making it tougher for borrowers of all kinds to get credit -- from credit cards to auto loans.
USAA Federal Savings Bank, for example, recently raised credit-score cutoffs slightly for auto loans, credit cards and personal loans. A Citigroup unit started charging higher auto-loan rates for borrowers with flawed credit. And banks are lowering credit limits for a small but growing number of cardholders with lots of debt or with big balances relative to their credit lines, says Curtis Arnold, founder of CardRatings.com.
Twentysomethings with relatively short credit histories need to be especially vigilant about making the most of the limited information on their credit reports -- so they don't inadvertently limit their access to credit or raise the cost.
Timeliness is Tops
The first step to good credit, of course, is paying all your bills on time. Payment history accounts for 35% of a credit score, according to Fair Isaac, the company behind the FICO score commonly used by lenders.
Next up: Check your credit report. You can get a free report every 12 months at annualcreditreport.com. (It won't come with a FICO score unless you pay extra.)
The report can be a sobering document if you have a woeful payment history or carry a heavy debt load. Suzanne Hildebrand, a 25-year-old administrator at a nonprofit in Fresno, Calif., was "not so happily surprised" when she pulled her husband's credit report three months after the wedding. He had a history of late payments and some accounts that were sent to collections.
"My gut instinct was to close as many accounts as possible," Ms. Hildebrand says. But a little research taught her a valuable lesson: When it comes to bolstering a credit score, acting on instinct can create big problems.
Tips on Credit Triage
One thing you should know: The credit bureaus don't wipe old accounts off your record when they're closed or paid off, so any late payments or collections associated with an account will still be used to calculate a credit score.
Plus, you lose the benefit of a closed account's longevity. Length of credit history accounts for 15% of a score, according to Fair Isaac. Older accounts are generally better, so you want to be judicious about closing old accounts and opening new ones, two actions that lower the average age of your accounts.
Consolidating debt to one card can backfire, because it often ups your "utilization rate," a gauge of how much of your available credit you're using. That rate contributes 30% of the FICO score.
Two cards, each with a $10,000 limit and a $5,000 balance, are generally better than one card with a $10,000 limit and a $10,000 balance, says money coach and author Lynette Khalfani Cox. The utilization rate is only 50% in the first example, but it's a whopping 100% in the second, even though the amount owed is the same.
Some twentysomethings try to lower utilization rates by opening new accounts and spreading their debt across several cards. But try to apply for credit only when you need it.
One reason: New credit counts for 10% of a FICO score. People hungry to borrow tend to be bad risks, so Fair Isaac is watching for how many new accounts you have and how many recent requests for credit you've made. A request for credit stays on the report for two years, and counts as part of the FICO score for 12 months.
Fair Isaac offers a free booklet called "Understanding Your FICO Score" at MyFico.com. Another helpful guide is "What You Should Know About Credit History," available on HSBC North America Holdings' YourMoneyCounts.com site.