My friend Arnold was applying for a mortgage to buy a new home. Someone told him to settle his credit card accounts. He did. What happened is that Arnold's credit scores went south and he didn't get the mortgage. You see, the payoffs resulted in the creditors updating their records, which brought negative items into play.

Huh? What's that again? You pay off your debts and it works against you?

Okay, let's take another look at this because many people get it all wrong. Let's assume you are one of the 200 million Americans who use credit: For example, you have a mortgage, you owe on a car loan or lease, you use credit cards to buy things. All of your payment history is kept by three credit repositories: TransUnion, Equifax, and Experian, the former TRW. These companies compile all the data and whenever you apply for credit, they furnish reports to the one extending the credit offer. Also, keep in mind that your credit history surfaces when your credit cards come up for renewal and even before an insurance company issues a homeowner's policy.

A decade ago, an outfit named Fair Isaac & Co. developed a specific scoring model that grades credit on a sliding scale. Most credit issuers today use this FICO score as the major factor in whether or not they will extend credit. A FICO score is, in effect, a method of determining the likelihood that credit users will pay their bills. In short, a credit score attempts to condense a borrower's credit history into a single number.

Credit scores are calculated by employing scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Credit scores analyze a borrower's credit history considering factors such as late payments, amount of time credit has been established, amount of credit was used versus the amount of credit available, length of time at present residence, employment history, and negative credit information such as bankruptcies, charge-offs, collections, and the like.

David Steinberg, a mortgage broker in New York, admits that the score is still a bit of a mystery. "I analyze hundreds of credit reports a year and yet I can't always explain how a given FICO score correlates with the credit I see."

So, let's return to our friend Arnold who is trying to obtain that mortgage. He was advised somewhere to close all his credit card accounts; in other words, to make final payments and rip up the cards. Steinberg says that is bad advice. "It turns out that one factor in a credit score is the percentage of available credit that one can draw upon--a higher percentage borrowed relative to available credit negatively impacts the credit score."

How do you increase your score? Pay bills on time, do not apply for credit frequently, reduce credit card balances, and if you have limited credit, obtain additional credit. As strange as it sounds, not having sufficient credit can adversely affect your score.

Anybody want to lend me a million dollars?

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