A Squeaky Clean Credit Report

Question of the week:It seemed that every place I did my holiday shopping this year offered a discount for opening up a store credit card. I'm afraid that I fell for it and now find myself the holder of four brand new credit cards. Have I ruined my credit score? --J.T., Gainesville

Dear J.T.,

Owning a handful of cards seems to be a habit for most Americans. According to Fair Isaac Corporation (FICO), the company that compiles credit scores for the three national credit reporting agencies, the average consumer has about seven credit cards. I suspect that some of those accounts were opened under circumstances just like yours.

When we asked Armchair Millionaires about the number of credit cards they have, we heard the entire gamut, from those who believe in keeping credit cards to an absolute minimum to those who have a whole stack of plastic. Here are two such comments:

"I have just one credit card which I use daily for everything. I chose it because I receive frequent flyer miles for each dollar I spend. Without fail, I pay the entire balance monthly." --Cecelia KC

"I have 16 credit cards, although I only really need one. All of these cards are older cards that I'm trying to pay off and then close." --Jenny

In terms of how your new cards will affect your credit score, you can take comfort in knowing that, according to FICO, the amount of new credit you have is just one of many factors it considers when it calculates your score. My guide provides an overview of the information FICO uses to determine your score, along with tips for improving your score.

The Armchair Millionaire's Guide to Ramping Up Your Credit Score

• Payment history. Whether or not you've been late paying your bills is the most important factor FICO looks at in calculating your score. Raising your score in this area is simple: Pay your bills on time!
• Amounts owed. This includes how much you owe overall, how many accounts have balances and how much of your credit line you're using with each credit card. The best way to improve in this area is to keep your balances low or better yet, at zero.
• Length of credit history. This looks at how long your credit accounts have been opened and how long since you've used certain accounts. In general, a longer credit history will help your score. On the other hand, opening a lot of new accounts all at once will lower the average age of your accounts, which will have a negative effect.
• New credit. This includes how many new accounts you have, how long it's been since you opened an account, and how long it's been since lenders made inquiries on your credit report. To keep your score up in this, don't open up a lot of new accounts all at once. At the same time, if you've had credit problems in the past, you shouldn't hesitate to open a few new accounts over time--provided you know you'll be able to pay them off in time.
• Types of credit you use. FICO looks at the kinds of credit you use, such as credit cards, a mortgage and car loan, as well as the total number of accounts you have. In general, having a mix of accounts will improve your score--people with no credit cards, for example, tend to be a higher risk than people who have credit cards and manage them well--but you should still not open new accounts just to get a better mix.

THE BOTTOM LINE: Because your credit score is determined by so many different factors, one wrong turn is not likely to completely sink your score. The accumulation of many bad decisions will, however. Know what keeps your credit score up and manage your credit accordingly.

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