I just read this story from www.thesimpledollar.com and I found it most interesting. Check the site out for awesome financial information.

When people discover a problem with their credit score, they often act rashly, doing things that seem as though they would improve your credit, but actually damage a credit score. Before we get into the ten mistakes to avoid, let’s first look at what makes up one’s credit score, as defined by Fair Isaac:

Although the exact formulas for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following components and the approximate weighted contribution of each:

35%,- punctuality of payment in the past (only includes payments later than 30 days past due)
30% – the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
15% – length of credit history
10% – types of credit used (installment, revolving, consumer finance)
10% – recent search for credit and/or amount of credit obtained recently

Mistake #1: Cancelling old credit cards. 15% of your credit score comes from the length of your credit history. Thus, cancelling your oldest credit card can often be a mistake. Also, if you have balances on other cards, cancelling an old credit card can also worsen your debt ratio, which makes up 30% of your score. If you don’t have other sources of credit that are older than seven years, you should not cancel your oldest credit card.

Mistake #2: Staying current on “most” of your cards. 35% of your score focuses on punctuality of payment, with only payments that are more than thirty days late affecting your score. If you’re going to be late on any cards, make up that payment before it’s thirty days late. Don’t keep up with all but one or two of your cards and let those go later and later; instead, juggle the cards a bit if you have to, but make sure you are not too late on any one card.

Mistake #3: Having too many open lines of credit. 10% of your score comes from the types of credit used. If you have a lot of sources of revolving credit (i.e., credit cards), you can be seen as a credit risk because you have the potential of racking up a lot of debt very quickly. Don’t open store credit cards just to get a discount, and if you have any recent store cards, cancel them once they’re paid off.

Mistake #4: Maxing out your cards. 30% of your score comes from the ratio of your credit card debt and your credit limits. Thus, if all of your cards are maxed out, your credit score is suffering even if you’re keeping up with the payments. Instead of charging and buying more and more, focus on paying down the cards with extra payments.

Mistake #5: Avoiding loans and debts. In the eyes of your credit report, no debt is effectively bad debt. If you’re a credit card teetotaler, you should still consider getting one and making an occasional purchase with it. I have a friend who has one credit card which is associated with his gas station chain of choice. He uses it just for gas purchases, racks up discounts on it, pays it off in full each month, and it helps him maintain a solid credit score in case he needs a loan.

Mistake #6: Requesting a credit limit reduction. Some people believe that they have too much credit and that they’re better off with a credit limit reduction. In fact, the only significant effect a limit reduction has on your credit score is a negative effect on your debt ratio. Only get a limit reduction if it has a huge psychological value for you; otherwise, it will hurt your credit score.

Mistake #7: Utilizing the first credit counseling service you hear about. Quite often, the ones that advertise the most are the ones that do the shoddiest job. Use the FTC’s advice and find a reputable credit counseling service in your area. Call several of them from the yellow pages and ask the questions from the FTC page to find ones that seem legitimate, then check with the Better Business Bureau before moving forward. Remember, your credit score will affect many of your financial moves for years, so don’t skimp out on your research if you’re thinking of using a counseling service.

Mistake #8: Declaring bankruptcy. Many people go forward with bankruptcy because they believe it’s the only way out. Instead of taking such a drastic measure, seek counseling first with one of the more legitimate sources mentioned above. Bankruptcy can really decimate your credit score for a very long time. Quite often, there are better solutions, such as negotiating with creditors and so forth.

Mistake #9: Practicing credit card arbitrage. This game can seriously damage your credit score if you’re not an expert. Shy away unless you’re financially stable and know exactly what you’re doing; if you make a mis-step, your credit score could easily be demolished.

Mistake #10: Never checking your credit report. Most people who behave well with their credit just assume that their credit is fine, but sometimes incorrect things can show up on your report. Visit annualcreditreport.com to get the free report that the United States government guarantees you from the three major agencies. Don’t go to freecreditreport.com; it’s a rip-off.