One of the best things you can do to build awareness of your financial condition is to view your credit report. Granted, in this case, it’s your perceived condition, not by your friends, neighbors, and nosy individuals who think they can tell how much you earn by the car you drive or the clothes you wear. Your financial condition as perceived by potential lenders can cost or save you many thousands of dollars throughout the repayment life of a mortgage, for instance. The first clue to this perception is the credit report.
You get get them for free these days. In fact, you can get three credit reports, one from each of the three major reporting bureaus, each year. Visit annualcreditreport.com three times a year. I try to space my credit reports out evenly, but I don’t particularly like schedules.
If your credit report is anything like mine, it contains a list of credit cards with basic information like partial account numbers, credit limit, and payment history. Some probably date back to college when you signed up for a credit card in exchange for a free tee-shirt at freshman orientation and you may no longer even know where the actual physical credit card is. For example, here’s a snapshot of one card that may or may not be from my own credit report.
Step 1. Save your best, oldest card. Find the credit card with the longest, cleanest history, and keep this card. If you don’t know where the credit card is, call the company to update your address information and send you a new card. This probably isn’t the card you want to use; keep the credit history clean and earn rebates with newer cards.
Step 2. Close all other inactive accounts. You can do this by calling the phone numbers that are listed with the information for each card. If you have an active card with the same company, ask to move your credit limit from the inactive card to the active card, and then close the inactive card. These first steps will keep your credit history long and your credit report short.
Step 3. Choose the best card to use. If you are struggling to get out of debt, this should be a low-interest card with no perks. If you are managing your money well, this should be the card that offers the best perks (like cash back, airline miles, etc.) for you and your lifestyle. Try looking through lists of cards like 50 cards offering 0% APR on purchases, best credit cards for airline miles, rewards credit cards for drivers, best cards for 0% balance transfers, or credit cards with cash back and no annual fee.
You may not have to apply for a new card if you already have one by the same lender; just call customer service and ask to convert your card. They may have some additional options for you.
If you want to qualify for the lowest mortgage rates, the bottom line is you want to keep your oldest, cleanest credit card to show a long, solid history of responsible credit, have a low available credit to income ratio (by closing open cards), and have a low debt to income ratio (by paying off your balances every month).
Beyond qualifying for low mortgage rates, it’s also important to have a low debt to available credit ratio, so consolidate your available credit as much as possible before closing cards.
Image credit: The Consumerist
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