by Charles Blazer

Created on: April 23, 2008

In order to understand how to get good credit, you must understand how credit scores work. Certain rules of credit scoring simply don't make sense, but you must understand these rules and play by them to have any hope of getting a good credit score. Doing what you think is good for your credit, without actually knowing the rules, is the equivalent of throwing darts in the dark. Yeah, you might hit the target... but your chances aren't very good.

So here are the rules you need to know:

FIRST MAJOR SCORING FACTOR: LATE PAYMENTS
If you make on-time payments on your debts (credit cards, mortgage, auto loan, etc.), then your score goes up. It doesn't matter if you're only making the minimum payment or paying off the whole debt. It doesn't matter what the interest rate is. As long as you're paying on-time every month, your score slowly goes up.

Conversely, if you make late payments, then your score goes down drastically. The later the payment, the harder it dents your credit. 30, 60, and 90 days late are magic numbers - the thresholds at which your score drops dramatically. (for example: a payment made 50 days late is treated like a payment made 30 days late; 61 days late is treated as 60 days late; etc.) I can't stress enough how badly this hurts your score. A single mistake costs you dearly for many years. Never miss a payment!

You can exploit this by having a credit card that you never use, with a zero balance. Your monthly "minimum payment" will be $0.00. You'll never be late, and you'll build good credit, because the the credit card company will report that you are making timely "payments" every month. Your score will go up, and you don't even have to do anything.

SECOND MAJOR SCORING FACTOR: BALANCE-TO-LIMIT RATIOS
For each credit card you have, a low ratio between your balance and your limit will improve your credit score. Try to keep the ratio under 5% (for example: a $100 balance on a card with a $2000 limit). Conversely, having a single card that's nearly maxed out will severely damage your credit.

For example:
GOOD: 4 cards, each with a $2500 limit and a $500 balance ($2000 total debt, $10,000 total limit).
BAD: 4 cards, each with a $2500 limit; one with a $2000 balance and three with a $0 balance ($2000 total debt, $10,000 total limit).

Notice in that example you have the same amount of debt and the same combined credit limit. But the person with the $2000 balance on one card will have a much lower credit score, despite the fact that he has a $0 balance on other

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