Your Guide to Credit and Personal Finance

How Fed rate cuts affect your credit card
Fed rate cuts mean that it may be a good idea to shop around for the best credit card interest rate.

Q. When the prime rate and other key rates are falling, does that mean credit card interest rates will decline as well?

A. Generally, yes. Fed rate cuts often translate into better deals for many credit-card holders, said Justin McHenry, research director for Indexcreditcards.com, which compares credit-card features.

On the other hand, a number of credit-card companies have recently raised rates despite the recent rate cuts by the Federal Reserve. This may be in response to the subprime mortgage crisis and unrest in the credit markets. So some credit card holders may have actually seen increases in their rates

Depending on your credit-card agreements, payment history, and credit history, cardholders may find that their interest rates fall automatically after a Fed rate cut. If, for example, your rate is prime plus 4.99 percent, your Annual Percentage Rate, or APR, may fall along with the prime rate.

And you might be able to get an even better deal.

“For a lot of people, this is a good time to either see if they can get a lower rate, or to look around” for other cards charging a lower rate, McHenry said.

Some credit cards have a floor below which rates can’t fall, he said. But it’s cheaper for a credit-card company to keep old customers than to recruit new ones, so many companies are willing to bargain within those limits to keep good customers.

“Your best negotiating point is how good your credit history is and whether you actually could go get another card,” according to McHenry. “You need leverage on your side. The more you know about your credit history, the more leverage you have in asking for something.”

One caution: Your credit could take a slight hit if you close an older account in favor of a new one, especially if you will be close to the credit limit on the new account with a balance transfer.

Tips to raise your credit score
A better credit score can help you get a better loan rate.

Your credit rating can help determine whether you get a loan and what interest rate you pay, so getting your score as high as possible can save you big bucks.

The difference in interest rates for mortgage loans is nothing to sneeze at. Someone with a FICO score, or credit rating, of 760 to 850 could pay $188 less per month on a $216,000 30-year fixed-rate mortgage than someone with a score of under 658, according to MyFICO.com. The amounts are based on interest rates of 5.99 percent for the higher rating and 7.31 percent for the lower rating.

Credit scores are grouped into five basic categories, according to MyFICO.com. In general, about 35 percent of the score is based on your payment history, about 30 percent on how much you owe, 15 percent on the length of your credit history, 10 percent on new credit and 10 percent on types of credit used. The mix can vary depending on your situation.

Credit ratings evolve over years, but there are ways to raise your credit score a few points at a time.

Pay your bills on time.
“I’m not sure a lot of people understand that,” said Jack Guttentag, professor of finance emeritus at the Wharton School at the University of Pennsylvania and the man behind The Mortgage Professor Web site (mtgprofessor.com). “They always say, ‘I always pay it eventually.’ ”

Pay more than the minimum on your credit cards every month.
Your score could go up a few points as your credit card balances go down. Just a few larger payments can help if you previously were paying the minimum.

Limit the number of new credit-card accounts you open.
An exception is for people who are trying to re-establish credit after a bankruptcy or other financial crisis, according to MyFICO.com. “Opening new accounts responsibly and paying them off on time will raise your score in the long term,” says the Web site, which is published by Fair Isaac, the company that invented the FICO score.

Keep your balance well below the credit limit on revolving accounts like credit cards.
Your credit score will likely be higher if you have small balances on four or five credit cards (as an example) than larger balances on two or three cards, especially if the balances are close to the credit limits, Guttentag said.

Pay off any uncollected items.
Your credit score is being hurt if you’re withholding payment because of a dispute with the lender, no matter how “right” you are.

And finally, always remember that paying down your revolving credit, or credit cards, is the best way to improve the portion of your credit score that looks at how much you owe.

3 myths about your FICO® scores
Managing your credit rating can help you become a smarter borrower.

Failing to understand how your FICO® scores are calculated can be costly. Although it’s not the only thing lenders look at, the scores calculated by the nation’s three major credit-rating bureaus can make or break your loan request, or at the very least increase the cost of borrowing.

Yet myths about how these important scores are calculated persist, potentially keeping borrowers from getting higher credit ratings - and lower interest rates.

Here are three myths - and realities — about FICO® scores:

Myth: Closing old or paid-off accounts will increase my score, especially if I open new accounts.
Truth: Old accounts in good standing generally benefit your FICO® score. They show you have a long history of managing credit, particularly if you pay off the balances or keep them low. What’s most important is to stay well below the credit limit, regardless of the age of the account. And be reasonable about the number of credit cards and accounts you maintain.

Myth: My score will go down if I shop around for a loan.
Truth: If you’re shopping for a mortgage or an auto loan, multiple credit inquiries for the same type of loan within 14 days won’t affect your score. The formulas used by the three major credit bureaus recognize you are shopping for the best rate. However, if you’re shopping for a mortgage one month and an auto loan two or three months later, your FICO® score could take a hit.

Myth: I don’t need to check my FICO® scores if I pay my bills on time.
Truth: Credit reports often contain errors that can bring down your score. The only way to know the information is accurate is to check your credit report yourself. You can get one free credit report a year from each of the agencies: Equifax, TransUnion and Experion Group Ltd. Keep in mind that the free credit report does not give you your FICO® score. You can get all three of your FICO scores at www.myfico.com.

Fair Isaac, the company that developed the FICO® score formula, had made changes in 2008 meant to better predict risk. The occasional delinquency will count less, but patterns of delinquency or other problems will count more.

Old formula or new, the basics remain the same. A solid record of paying bills on time and avoiding becoming overextended is your best path to getting and keeping a good FICO® score.

Visit the LendingTree Credit Resource Center for information and tools to help you manage your credit.