Do: Pay Down Debt If you have the funds to pay down your debts, you can raise up your score. It’s the fastest single step you can take. Your score will improve as soon as the new balances are reported to the credit bureaus and factored into your score, which takes about a month. When you order your credit score from www.MyFico.com, you get access to a neat tool called the FICO Score Simulator, which lets you enter different scenarios and see how they would affect your score. I checked the FICO Score Simulator to see how many points I could gain just by paying off the current month’s charges on my credit cards. I don’t even carry a balance, and look at the difference it makes:

Benefit of Paying Down Debt

Eli’s score before paying off bills	785
Eli’s score after paying off bills	825
BIG GAIN =	40 points

Forty points is a significant gain. If you are planning to apply for a mortgage and you need to boost your score, start three to six months in advance. Aggressively pay down your debt so that it is only 10 to 30 percent of your limit. If you can pay it off completely, so much the better. After that, pay cash for everything for three to six months before applying. It will make a substantial difference.

Do: Pay on Time Don’t get mad at me. I’m not insulting your intelligence here. Obviously paying on time will improve your credit score, because payment history makes up 35 percent of it, the single biggest category. But here’s the part you may not know: The FICO scoring model gives more weight to recent history than to ancient history. This is good news that you can use to your advantage. It means every positive move you make now helps counteract mistakes you made then. Just by beginning to pay your bills on time, every time, you will raise your score. It’s that simple. But it takes time.

On the flip side, a single late payment—just one—can make your credit score plunge. It’s one of the cardinal sins of credit scoring. I just used the Score Simulator at MyFICO.com to see what would happen if I myself make a late payment. Here’s what it showed me.

Impact of a Single 30-day Late Payment

Eli’s score before late payment	785
Eli’s score after late payment	685
BIG LOSS =	100 points

Don’t think for a second that because you have a high score, you can afford to be tardy. Late payments hurt high scores even more than low ones because they stick out more dramatically. A late payment coming from somebody who often pays late is just a sign that their dog ate the bill—again. A late payment on an otherwise pristine credit file is like an early-warning flare showing that an individual’s financial life may be crumbling.

While we’re talking about late payments, you should know that you are responsible for paying your bills on time—even if they don’t show up. If a bill is lost in the mail or doesn’t make it to you on time because you have moved or are in the hospital or something, it’s still your responsibility. Don’t blow it.

Paying a bill late is such a big, bad black mark that if you have a dispute with a creditor, I recommend paying the bill anyway while you fight over it. True, you are momentarily out that cash, and it may be a struggle to get it refunded, but if you don’t pay, and the merchant reports you as late, the cost to your credit score could be far more expensive. Once the matter is resolved, if the creditor agreed to accept some kind of partial payment, get that agreement in writing, so you’ll have proof.

Late Payments Are Not Usually Reported until 30 Days Overdue

Now that I’ve got you completely freaked out about late payments, I’ll fill you in: that three-day slip-up when you couldn’t find a stamp shouldn’t be a problem. Thirty days is the be-all, end-all benchmark. But don’t make it a habit. You don’t want to rely on your creditors’ goodwill. They could change their practices at any time—and might, in order to make more money.

Do: Pay Automatically If you have trouble paying your bills on time because you don’t have enough money, that’s one thing. But if you have trouble paying on time because you’re busy or absent-minded, that’s another. It can happen if you travel a lot for work, if you have a new baby, if you’re struggling with a chronic sickness, or if you’re recently divorced and your spouse used to handle the bills. Plenty of people are so disorganized, busy, or frazzled that they pay their bills late even though they have the money.

If you know that you’re one of those people, don’t beat yourself up, sign yourself up—for an automatic bill-paying service. By doing so, you arrange for your creditors to automatically zap your checking account each month so you always pay on time. I know, it sounds kind of scary, but they are not allowed to withdraw any more money than you authorize. Automatic bill-pay works best for accounts that are the same every month, like mortgages. It’s a wise move that will save you tens of thousands of dollars by protecting your credit score.

Report Thefts Immediately

If you’re defrauded via an electronic transaction, your bank might not pay you back. The Federal Reserve’s Regulation E says you must report thefts involving online banking, ATM cards, and debit cards within two days to limit your liability to $50. Your liability jumps up to $500 on the third day. And if you don’ t report the loss for more than 60 days, you are responsible for the entire loss. Another reason to keep an eagle eye on your bank statements.

Do: Keep Ratios Low The next most important thing you can do to achieve a high credit score is to keep your credit utilization ratio low. The credit utilization ratio compares the amount of debt you have to the amount of credit you’ve been approved for. All it really means is don’t max out your credit cards. I used the FICO Score Simulator to see what would happen if I maxed out my credit cards. Take a look:

Impact of Maxing Out Credit Cards

Eli’s score before running up cards	785
Eli’s score after running up cards	675
BIG LOSS =	110 points

Ouch, 110 points is devastating. To achieve the best possible credit score, you should not use more than 10 percent of the available credit on your credit cards. However, I think that’s unrealistic (and I like to earn rewards with my card), so I’m going to suggest the benchmark that gives you the next best credit score: 30 percent. That means if your limit on a card is $1,000, you should never charge more than $300 on that card, even if you pay it off in full. Brutal, huh? Well, amounts owed make up nearly a third of your credit score, so this is critically important.

If you carry balances, then you should make sure that all of those balances are below the 30 percent mark. The 30 percent ideal is applied to each separate card balance and to all your cards when averaged. In other words, even if your average is fine because most of your cards have little or no balance, you can still be penalized if one card is near the limit. The scoring model wants you to have credit but barely use it. Paradoxical, isn’t it?

Do: Apply for a Secured Credit Card If you are young with a thin credit file, one way to fatten it up is to sign up for a secured credit card. You put down a deposit, say $500, and in exchange you get a credit card with a $500 limit. It sounds like a debit card, but it’s not. A secured credit card is reported to the credit bureaus, so by paying it on time and keeping the balance low you will be building a positive credit history that helps your score.

Advance-Fee Loans Are Illegal

If somebody says they can guarantee you a loan in exchange for a fee, it’s a scam. No bank can guarantee you a loan up front. A real lender might charge a small fee for a credit check, but large fees, especially if they’ re called processing fees, are a telltale sign of a rip-off. If you pay the fee you will get nothing in return.

Don’t Do That

I have a two-year-old daughter and I find myself telling her “Don’t do that” way more often than I say “Do this.” I’m trying to teach her right from wrong, and keep her safe and at this age the don’ts are pretty important. Similarly, the don’ts of credit scoring are as vitally important as the dos.

Don’t: Apply for Multiple Credit Cards at Once When I was working in my first (poorly paid!) TV news job, I got hold of a list of low - interest credit cards. Fearful that I would have trouble qualifying, I applied for every single one of them. Guess what? They all turned me down. The reason? Too many applications for credit!

As I mentioned before, Bill Fair and Earl Isaac discovered a statistical connection that showed that people who apply for a bunch of credit at once are at greater risk of not paying in the next couple of years. In fact, Fair Isaac says a consumer who has applied for six or more loans (mortgages, auto financing, credit cards) in the past year is eight times more likely to declare bankruptcy than someone who has no new credit applications on their record. Fascinating—unless that person is you.

This is a good reason not to open store charge cards when the clerk asks, “Would you like to save an extra ten percent today? ” It may sound like a tempting offer, but 10 percent is Small Stuff Savings (unless you’re buying something huge.). Plus, the new credit application could drag down your score enough to cancel out the savings you just saw at the register. Don’t believe me? Back I go to the FICO Score Simulator to learn the impact of opening a new store card.

Impact of Opening a New Store Credit Card

Credit score before store card application	785
Credit score after store card application	775
BIG LOSS =	10 points

You can lose 10 points just for opening a department store card! If you were right on the border between two different FICO score tiers, that 10 points could really cost you when you apply for a big loan. Students of credit scoring swear the ideal number of cards to achieve the optimum score is two. Just two. Fair Isaac isn’t saying, but the ideal number certainly isn’t 20!

Don’t: Close Existing Accounts On the other hand, if you have gradually opened up a lot of credit card accounts over the years, and you pay them in full or don’t even use many of them, let it be. I used to believe that having a lot of open, unused accounts was a strike against you because you could potentially dig deep in your drawer, find those cards, and go crazy with them. According to Liz Pulliam Weston, syndicated MSN Money columnist and author of Your Credit Score: Your Money and What’s at Stake, this is a myth.

Bottom line: Don’t close those accounts. It could hurt that all - important credit utilization ratio by reducing the total amount of credit you are approved for. It’s especially bad to close longstanding accounts, since length of credit history makes up 15 percent of your score, the third biggest chunk.

When Old Is New Again

Paying off an older collection account may not be a good idea. Why? By law, the credit bureaus are supposed to assign the original delinquency date to every debt. But sometimes when debt collectors make a fresh report about the status of that same debt, it gets re-aged so it looks like a recent problem. This isn’ t supposed to happen, but it can. As you know, recent activity is weighted more heavily than older activity. So if an unpaid debt is close to the seven-year mark when it will fall off your report, you may want to let it be.

Don’t: Consolidate Debts Many people who are trying to dig out of debt will get a new low interest credit card and move all their old credit card debt onto it. It’s a reasonable choice if your goal is to save time and hassle. But, believe it or not, it can hurt your credit score. How? Because now you have one big balance on a single card, making it closer to the limit. The ratio. The ratio. It’s all about the ratio.

Plus, when you remove your balances from those other cards and stop using them, the banks will likely close the accounts for inactivity. That will hurt your length of credit history because you’ll have lost older accounts and opened a new one.

Don’t: Cosign Loans If you are trying to shield and protect your credit score, don’t agree to be a cosigner on a loan. Sure, you want to help. But it’s not just paperwork. That cosigned loan goes on your credit report. And if your friend or family member pays it late or doesn’t pay it at all, it will ruin your credit score. Worse yet, cosigning means you agree to pay that loan if your friend or family member cannot or does not. Are you ready for that? You could lose your good score, your money, and your friendship.

Don’t: Go Shopping Until Your Mortgage Closes After your mortgage application is approved, while you’re waiting to close on the house, it’s tempting to go on a shopping spree. You want to get nice, new stuff for your dream house, right? Wrong! Many lenders will recheck your credit before the closing to make sure everything is in order. Maxing out your credit cards to buy furniture and knick-knacks could knock 40 or 50 points off your score. That could be enough to get you disqualified or raise your rate.

Don’t: Ignore Small Balances The Classic FICO scoring model holds late payments and collections against you no matter their size. If you once failed to pay a $25 bill, it is just as bad as failing to pay a $25,000 one. FICO,’08 has been reformulated to ignore collections for less than $100, but you can’t count on the new formula because lenders use all different editions of the scoring software.