Our goal is to educate you on credit and how it works. Your understanding of credit and how it works is extremely important because of the many ways credit affects your financial future. We all know how important it is to have good credit. Understanding credit is the first step towards building or rebuilding credit.

In this section, you will find an enormous amount of priceless information such as:

• What is Credit?
• How does Credit work?
• Credit Bureaus and Credit Reports
• Who is Looking at Your Credit Report?
• Credit Report basics
• Credit Scores – Why should I care?
• What’s in my Credit Report?
• What are Credit Inquiries?
• How are Credit Scores calculated?
• What is a FICO Score?
• All About Credit Scoring
• 15 Signs that you Need Credit Consulting
• The Truth About Credit Repair!
• 5 Credit Cards You Should Never Close
• Cancel a Card=Hurt Your Credit Score

What is Credit

Introduction to Credit
Remember when you were younger, how fascinated you were whenever you saw someone using a credit card. Back then, it seemed like credit cards were magical squares of plastic that could easily and conveniently be substituted for cash. If you haven’t figured it out yet, here’s one fact about credit that you must know: it’s not a cash substitute, but rather a loan that you must pay back with your future income.

What is Credit?
Whenever you make a purchase today with the promise to pay for it tomorrow, you are using credit. Having credit lets you make purchases when you don’t have cash available. Before a lender will allow you to use credit, it must first believe that you can be trusted to repay the amount of credit you use. This is considered financial trustworthiness.

Lenders use a number of factors to determine your financial trustworthiness.

The most commonly used factor is your credit history. How you have used credit in the past – your credit history – is considered to be the best way to predict how you will use it in the future. Your credit history is reported in your credit report and credit score.

When you are a new creditor and do not have a credit history, the lender might use other factors such as employment and salary to gauge your financial trustworthiness. Or, the lender might require that someone who does have favorable credit agree to repay your charges if you fail to do so. In this case, the two of you share credit.

How does credit work?

To establish credit with a financial institution, you must first make an application. The lender will use identifying information, like your social security number, to look up your credit history. If the lender determines that you are a trustworthy borrower, then it will extend credit to you.

Once you have been approved for credit, the lender will give you guidelines, or terms, for using your credit. The terms include, but are not limited to, how often you should send payments for purchases, what happens if you are late on a payment, and the cost of using credit.

Usually, the lender establishes a maximum amount of credit that you can use, a credit limit, based on your credit history. Your credit terms will outline what happens if you exceed this limit. In most cases, there is a monetary penalty.

When you’ve been approved for credit, the lender provides you with a way to use this credit, e.g. a credit card. Periodically you will receive a billing statement from your lender detailing purchases you’ve made, interest charged, minimum payment amount due, and payment due date. Per your agreement with the lender, you must make payments by the due date to avoid penalties.

Credit Bureaus and Credit Reports

The Nature of Credit Bureaus

LET'S BEGIN with a startling notion: The Credit Bureaus don't want you to read this. Why? Probably because those agencies, along with the much larger banking institutions which depend upon them, desperately need consumers to buy into a few oft-told myths which perpetuate their respective businesses. Unfortunately, though, not knowing the truth can cost a consumer tens or even hundreds of thousands of dollars during an average lifetime.

Where credit bureaus are concerned, there are essentially two sets of "truths." On the one hand, there is the fairly meaningless happy patter they want you to believe, which you can find repeated in just about every credit-related book and Internet site. And then, of course, there's the real truth which I'll shortly elucidate.

Unfortunately, in order to truly embrace stark reality we must first peruse the prevailing fiction. So we'll examine both here. This article will aim to demolish the social psychosis perpetuated by companies like Equifax, Experian, and TransUnion and transport you to a veritable Valhalla of consumer mental health. Even better, maybe you'll end up saving a few bucks too.

There are three official credit bureaus, and these beloved and vital American institutions maintain accurate records regarding the financial lives of every adult citizen.

There's so much wrong with practically every word of this fantasy that it's tough for a consumer advocate to know where to begin.

First, the so-called "big three" consumer reporting agencies with which most Americans are familiar (Equifax, Experian, and TransUnion) truly want consumers to believe that they've each been blessed with a sanctioned franchise. Actually, the only reason such corporate behemoths now dominate the landscape is because their progenitors simply managed to swallow up each other as they battled for preeminence through the decades. Greed, not official dictum, paved their way. Even if you didn't click the historical link in the previous sentence just now (and missed out on how, for example, the company which became Equifax once used Welcome Wagon ladies to spy for them), suffice to say there is hardly anything "beloved" about these privacy-busting companies.

Moreover, there are indeed other, newer, credit bureaus on the horizon (with names like Innovis, Lakeside, and NCTDE) which hope to eventually eclipse today's major players. In fact, anybody who so desired could start their own credit reporting agency, collect personal information about their friends and neighbors, and then attempt to sell that data to whoever would be nosy enough to purchase it. Sure, federal law puts limits upon what can be reported and to whom, but nothing bars any one of us from entering the field outright regardless.

So contrary to the prevailing perceptual reality, there are no official bureaus. And while most Americans perceive their credit reports to have at least the same legal standing as their driving records, the truth is that the government had no role in establishing the for-profit companies which produce them. Put bluntly, no law mandates a credit report's existence, and such documents deserve as much respect as "The Weekly World News" supermarket tabloid or any other similarly unproven list of allegations.

And what about the "accurate records" idea? Every serious study to date has reached the same conclusion: Credit reports are simply rife with errors!

Who's Looking at Your Credit Report

WE ALL KNOW that Mortgage Companies will evaluate your credit 2 or 3 times during the process of purchasing of home. It is obvious that folks with lousy credit have a harder time obtaining loans. And that seems reasonable, right? After all, who wants to lend money to someone with a poor record of paying it back on time? But these days, having some black marks on your credit report may mean more than paying a higher interest rate on your credit card. A growing number of companies — many of them having nothing to do with the business of offering credit — are also scrutinizing the data on those reports to decide whether to do business with you, and how much to charge. Some non-lenders have been using credit information in this way for years: Many property insurers, for example, rely on them to help set rates for homeowners' insurance, a practice that is relatively noncontroversial. And one potentially troubling use of credit data — by employers to screen potential new hires — has been sharply constrained by legislation.

But there's one industry in which the use of credit reports has been exploding in the last few years, and it's a business in which the pertinence of credit data seems tenuous at best: auto insurance. As many as 92% of the 100 largest personal automobile insurers use credit information to underwrite new business, according to a 2001 study by Conning & Co., an insurance-research and asset-management firm. At the time of the survey, more than half of this group had started using the data within just the past three years. And 52% of the companies used credit history not just to decide whether to insure you, but also to help determine the rates charged.

Credit Report Basics

Your credit report is an electronic record of your credit activities. These activities range from borrowing to buy a car or a home to applying for a loan or credit card. That's right -- every time you apply for a credit card or other loan, it registers as an inquiry on your credit report.

More importantly, a credit report is a record of how you use credit and how much of it you have available. If you're late in making monthly payments, that too shows up on your credit report.

Whether a lender is evaluating your loan request or a card company is considering whether to give you a credit card, you can count on an evaluation of your credit report to influence its decision.

Unfortunately, some of us mismanage credit and pay the price: Information remains on a credit report for years and may hurt the chance of getting additional credit. Sometimes, credit reports omit steps that borrowers have taken to improve their credit, or contain errors.

Credit Scores: Why Should I Care?

So you can have a place to live, get a job and not overpay on all your credit cards, etc!!!

When it comes to where you live, your credit is important. Mortgage lenders want to know that you won’t default on your mortgage. If you don’t have good credit, the lender will consider it risky to give you a mortgage loan. This could result in a higher cost of borrowing or worse, a denial of the loan.

Don’t think that because you’re not on the market for a new home, that your credit won’t be called into question. Your credit is used for rental decisions, too.

It's not just banks and lenders that rely on credit scores to help make important credit decisions. Landlords, employers, insurance companies, and even cell phone and other utility companies all reportedly utilize credit scores to help determine their business and credit relationships with consumers. This means that your credit is the most important component of your entire financial portfolio. Because of this, monitoring and managing your FICO score is vital, especially if you're looking to buy a home anytime in the near future.

FICO credit scores typically range between a low score of 350 and a high score of 850. Under the FICO system, securing credit becomes less expensive for borrowers with higher scores (those who represent the least risk) and more expensive for borrowers with lower scores (those who represent the most risk). In fact, when it comes to a mortgage, a lower credit score could easily cost a consumer hundreds of thousands of dollars more in interest throughout the life of the loan, compared to the same loan with a higher score.

The above chart from clearly reveals the relationship between higher FICO scores and lower interest rates and monthly mortgage payments. According to Experian®, one of the three main credit bureaus in the US, FICO scores also accurately reflect "the likelihood of a borrower becoming delinquent on a loan or credit obligation in the future." In other words, the FICO scoring model looks to the past to "predict" the future risk a borrower represents to a bank or lender, and then prices the loan accordingly.

What Kind of Information is on Your Credit Report?

How Does Information Get Entered On Your Credit Report?

Your credit report is an ongoing look at your personal information and how you manage your finances. Data is typically submitted to a credit reporting agency by your creditors, by the court system or from other public records, and by debt collection agencies.

Once a notation is made on your report, it doesn't drop off for awhile. That's not a problem for positive entries, but negative comments by your creditors can affect your buying power for several years. If the comments are accurate, they can stay on your report for seven years. Bankruptcies can remain on your report for ten.

Personal Information on Your Credit Report
These items are not used to evaluate your credit history. They are gathered from information you give to your creditors.

• Full name and variations of it (such as maiden names)
• Social security number
• Birth date
• Current and previous addresses
• Current and past places of employment
• Driver's license number and state where issued

Public Records and Collection Accounts
Data is collected from the court system and from debt collection agencies.

• Liens and judgments
• Bankruptcies
• Foreclosures
• Wage attachments
• Accounts in collection

Your Credit History & Current Obligations
Reported by your creditors.

• Dates accounts were opened
• Types of accounts (revolving, installment loan, mortgage)
• Account balances and credit limits
• Payment history for each account, including late payments
• Unpaid child support and overdrawn checking accounts can also be listed

Credit Inquiries

• Inquiries made when you are seeking new credit; too many inquiries in a short time are viewed negatively
• Inquiries made for promotional mailings, by your current creditors, and by yourself for informational purposes; these inquiries are not viewed negatively

Credit Inquiries

Part of your credit score (10% to be exact!) considers the number of inquiries made for your credit report. Credit inquiries are placed on your credit report each time a business requests a copy of your report. The Fair Credit Reporting Act (FCRA) requires businesses to have an acceptable reason for accessing your credit report. Acceptable reasons include:

• To grant credit
• Collect a debt
• Underwrite insurance
• Employment
• License issuing by some government agencies
• Legitimate business transactions

Companies who obtain your credit report under false pretenses or those who use it improperly violate federal law.

Two Types of Credit Inquiries

Not all inquiries that appear on your credit report affect your credit score. Inquiries that are made because of an application you made for credit are the ones that affect your score. These voluntary inquiries are the only credit inquiries that count towards your credit score.

When you review your credit report, you might notice that several inquiries appear from businesses to which you didn’t apply for credit. Other businesses might check your credit report because they want to offer goods and services to you. For example, creditors who send “pre-approved” credit card offers have often checked your credit report first.

Credit inquiries are also made by potential employers, businesses that you already have credit with, and yourself. None of these count towards your credit score.

Your version of your credit report includes all inquiries. When lenders and creditors look at your credit report, only the voluntary inquiries appear.

What Your Credit Score Is Made Of

Your credit score is a number that's generated by analyzing your entire credit profile. Scores range from 350 to 850. The higher your score, the less risk a lender assumes you will be.

Your credit score is a three-digit number that is used to predict how you will pay your bills. The score ranges from 350-850 and is calculated using your credit history information from your credit report.

When you make an application for credit, the creditor or lender uses your credit score to quickly make a credit/no-credit decision. This same decision can very well be made by simply viewing your credit report, but the credit score makes decision-making easier and less subjective.

While there are several different versions of the credit score, the most commonly used version is the FICO score. Developed by the Fair Isaac Company, the FICO score is used by many creditors and lenders to decide whether or not to extend credit to you.

Because some parts of your bill-paying history are more important than others, different pieces of your credit history are given different weights in calculating your credit score.

Even though the specific equation for coming up with your credit score is proprietary information owned by Fair Isaac, we do know what information is used to calculate your score.

Payment history is 35%
Lenders are most concerned about whether or not you pay your bills. The best indictor of this is how you’ve paid your bills in the past. Late payments, collections, and bankruptcies all affect the payment history of your credit score. More recent delinquencies hurt your credit score more than those in the past.

Debt level is 30%
The amount of debt you have in comparison to your credit limits is known as credit utilization. The higher your credit utilization – the closer you are to your limits – the lower your credit score will be. Keep your credit card balances at about 30% of your credit limit or less.

Length of credit history 15%
Having a longer credit history is favorable because it gives more information about your spending habits. It’s good to leave open the accounts that you’ve had for a long time.

Inquiries are 10%
Each time you make an application for credit, an inquiry is added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your credit score calculation only considers those made within a year.

Mix of credit is 10%
Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score. Open new accounts as you need them, not to simply have what seems like a better mix of credit.

FICO Score

Definition: The version of your credit score developed by and named after the Fair Isaac Corporation. The FICO score is calculated using information from all three major credit bureaus, while each individual credit bureau credit score only contains information from their individual reports.

Credit Scoring

Good Credit Translates into Lower Rates for the Consumer

Credit scoring has an enormous impact on a borrower's ability to purchase a home. It can mean the difference between getting a good interest rate and the home of their dreams, or whether they even qualify at all.

***For this reason, it is important for borrowers to understand the credit scoring process, and to be aware of their credit scores BEFORE they find the home of their dreams.

What the credit scoring model seeks to quantify is how likely the consumer is to pay off their debt without being more than 90 days late on a payment at any time in the future. Credit scores can range between a low score of 350 and a high of 850. The higher the client's score is, the less likely they are to default on their loan.

Only a rare one out of approximately 3300 people in the United States has a credit score above 800. These are the slam-dunk clients that walk away with the best interest rates. On the other hand, one out of eight prospective home buyers are faced with the possibility that they may not qualify for the loan they want because they have a score between 500 and 600.

Improving or repairing your credit is a process that focuses on improving lenders' perceptions of you as a credit risk.

Ultimately, lenders use their own guidelines to make credit decisions. However, your credit score is an important component in shaping those decisions. By taking steps to improve your credit score, you improve your creditworthiness.

You can find your credit score in your credit report. Credit scores generally range from 500 to 800, but can go lower if you're struggling with a poor credit history. Lenders offer the best rates for borrowers with higher scores, usually in the range of 750 and higher. Persons with a credit score in the 580 to 600 range can obtain credit, but will almost certainly pay a higher interest rate (Not FHA).

When you review your credit score, evaluate any disclosed reasons for not having a higher one. Fair Isaac, a major vendor of the credit-scoring software sold to credit bureaus, indicates that several major reasons for a low credit score are related to delinquencies. A delinquency results from failing to pay your bills on time.

Fair Isaac estimates that about 35% of your credit score is based on your loan payment history. Naturally, delinquencies adversely affect it. How much you owe, in aggregate, contributes another 30% or so to your score. Other factors that contribute (in roughly equal proportions) to your credit score are:

How long of a credit history you have. Here the advantage goes to adults who have had more time to establish credit.

Whether you've recently obtained other credit. If lenders perceive you as loading up on your credit, they're likely to take a cautious stance in offering additional credit.

Your current credit mix. Your credit mix indicates the types of credit you use. For example, mortgage debt is the loan on your home. Installment debt, which includes auto and student loans, also requires regular monthly payments. Revolving credit includes credit cards and credit lines.

15 Signs That You Need Credit Consulting

1. Your credit card balances are rising while your income is decreasing as a result of a divorce.
2. You are only paying the minimum amounts required on your accounts, or maybe even less than the minimums.
3. You're juggling bills. For example, you apply for another credit card and use cash advances from it to pay an existing card.
4. You have more credit cards than a successful gambler has poker chips.
5. You are at or perilously near the limit on each of your credit cards.
6. You consistently charge more each month than you make in payments.
7. You are working overtime to keep up with your credit card payments.
8. You don't know how much you owe and really don't want to find out.
9. You have received phone calls or letters about delinquent bill payments.
10. You are using your credit card to buy necessities like food or gasoline.
11. Your credit cards are no longer used for the sake of convenience, but because you don't have money.
12. You are dipping into savings or your IRA to pay your monthly bills.
13. You are hiding the true cost of your purchases from your spouse.
14. You're playing the card game by signing up for every credit card that sends you an unsolicited offer.
15. You have just lost your job, or are fearful that you are about to and are concerned about how you will pay all your bills.

The Truth About Credit Repair!

"Seeking help in repairing credit is unlawful"

Such statements are the most insidious and biggest lies of all. In fact, this is the very same psychology a predator uses with his victim: "Here, I'm abusing you, but follow my rules. You can't talk to others about it. You can't ask for help. If you do request or receive help from someone else, you'll only suffer more damage in the long run. Keep to yourself. Remember that I'll tell lies about you if I wish. And if you have any problem with any of this, speak only to me about it."

The facts cut straight to our constitutional citizenship: All of us have a fundamental right to legal representation. Whenever we are accused of anything, whether that accusation appears in the newspaper, on a rap sheet, on a credit report, or anywhere else, we are guaranteed the right to request assistance with both understanding and defending against such allegations.

Credit bureaus occasionally (and vaguely) suggest that using a third-party violates some law. Sometimes, they'll send a letter to consumers who have challenged one or more items on their reports that basically accuse them of having sought outside assistance with the problem. Note that they never actually come out and say plainly, "Using outside counsel is against the law," because it isn't. Instead they simply invite the consumer to write back and deny the charge or to implicate the third-party somehow in some unnamed wrongdoing. The specific wrongdoing is never spelled out, of course, but the effect is the same: The credit bureaus, by donning the cloak of artificial officialdom, hope to intimidate consumers into backing down and getting right back into line with all the other quiet people who are afraid to challenge their faux authority. Our clients are instructed to simply send such letters to the firm, but even those attempting to confront their credit reports on their own are well advised to simply ignore such provocations.

So long as consumers can be managed through skilled deception, credit bureaus will continue to unfairly profit at our expense. Reified credit scores will continue to define our suitability for home ownership. Credit acquisition, insurance, and employment will continue to be lost as a result of sloppy data maintenance. Fundamental changes will only occur when consumers reject these untruths which are propagated so successfully within our culture.

The fact is DivorceCredit.com will pay tribute to three, rather than just one, Federal statutes. In addition to the oft-chewed but rarely digested Fair Accurate Credit Transactions Act (FACTA OF 2003), one must also consider the Fair Credit Billing Act (FCBA) as well as the Fair Debt Collections Practices Act (FDCPA). Together, these three consumer protection statutes define your civil rights as a consumer. Understanding -- and even better, exercising and enforcing -- those federally guaranteed protections are the absolute best way to transform a poor credit score into a really good one.

Utilizing the expertise of DivorceCredit.com will provide the very best in Credit Consulting.

5 Credit Cards You Should Never Close

Many consumers close credit cards after becoming what seems like too delinquent to catch up. There seems to be the notion that closing cards makes delinquencies go away. Not only is this not the case, closing out a delinquent credit card will hurt your credit more than it will help.

Here are five credit cards that you should never close.

1. Any credit card that still has a balance.

When you close a credit card that has a balance, your total available credit is lowered to $0. Since you still have a balance on that credit card with no credit limit, it looks like you’ve maxed out. The amount of debt you have is 30% of your credit score; so a maxed out credit card, or one that appears to be maxed out, can have a very negative impact on your credit score.

2. Your only credit card with available credit.

Closing out this card will decrease total available credit and increase your credit utilization, which, as before, is not a desired situation.

3. Your only credit card.

Since part of your credit score into consideration the different types of credit you have, keeping a credit card in the mix will add points to your credit score.

You could get turned down for a credit card in the future because the creditor thinks you don’t have enough experience with credit cards.

4. Your oldest credit card account.

Closing out your old credit cards shortens your credit history. Lenders tend to view borrowers with short credit histories as riskier than borrowers with longer histories.

5. The credit card with the best terms.

Why let a good thing go? If you have a credit card that has a low interest rate, no annual fee, and other perks like travel insurance, keep it. A credit card that charges you less for making purchases is far better than one that charges you more.

It’s ok to close out a newer credit card that you no longer use as long as the card does not have a balance and you have other credit cards.

In identity theft and fraud situations, your creditors will advise you to close the credit card to keep the thief from damaging your credit even further.

You should be just as selective about the credit cards you close as the ones you open. Before you pick up the phone to alert your creditor that you want to close your account, make sure it’s not going to affect your credit score in a negative way.

Cancel a Card=Hurt Your Credit Score

Everyone knows that your credit score is important to your financial life, affecting the rates you get for mortgages, credit cards and insurance. Improving your score may save you thousands of dollars in interest. So would it help your score if you got rid of a credit card?

"Pay your bills on time and keep your credit expenditures under control, and you won't have to worry about your credit rating," says Craig Watts, spokesman for Fair Isaac Corp., which calculates the FICO score for consumers. "If you're having trouble doing that, sometimes canceling a credit card in an effort to get your credit behavior under control is more important than your credit score."

That's the short answer. But since virtually everything that makes up your credit score depends on something else -- depends on your credit mix, the number of cards you carry, the length of your credit history, your rate of credit utilization and myriad other things -- there is a longer answer.

In most cases, canceling a credit card won't help your credit score. In fact, it may actually hurt your score. You see, your credit score depends on how you shake out in five different credit-scoring categories, each weighted differently when calculating that score.

What counts in a credit score?

This chart shows how Fair Isaac Corp. values the various parts of your credit management to determine your credit score. Source: Fair Isaac Corp.

According to Evan Hendricks, author of the book "Credit Scores and Credit Reports," canceling a credit card potentially can hurt you in at least two of the five categories -- and maybe even a third.

Credit-utilization ratio is key. First, canceling a card could upset your credit-utilization ratio, the second most heavily weighted category in Fair Isaac's credit scoring algorithms. For example, assume you have three cards with total available credit of $20,000. Assume further that your outstanding balances total no more than $6,000 of that available credit at any one time. Since creditors like to see a credit-utilization ratio of 30 percent to 35 percent or less, you're in good shape. Now, assume that you cancel a card with a zero balance and a $10,000 credit limit. Suddenly, your utilization ratio jumps to 60 percent, and your credit score drops.

As counterintuitive as that seems, that could happen. Impersonal credit-scoring systems aren't concerned so much with how much available credit you have but with how you manage that credit. And in the credit-scoring world, a 30 percent utilization rate is much better than a 60 percent one. "That's what scoring models want to see, a good utilization rate," Hendricks says.

Building good credit takes patience and persistence. But what about quick fixes? Many of these tricks are scams. But there are a few sneaky ways to legitimately give your score a boost when needed.

Furthermore, he says, canceling that card could result in a double whammy to your credit score, "because each card is scored individually, and then all your cards are scored together. (If) you've just canceled the card with a zero balance, (you've) lost a great individual score." Regardless, if you still want to cancel a card, he says, "make sure to pay down your other balances to keep that rate in line."

Older credit is better - If you do cancel a card, you can compound your error even further by canceling the card that you've had the longest period of time and on which you've been making regular payments. By canceling an old card, the length of your credit history on open accounts will grow shorter. Both the FICO score and the VantageScore credit-scoring formulas take into account the credit histories of even closed accounts in assessing how long you've been managing credit. However, according to Watts, "that history will finally disappear from the formula when a credit bureau of its own accord removes old credit account information from your credit file."

Barrett Burns, CEO and president of VantageScore Solutions (the company formed by the credit bureaus Equifax, Experian and TransUnion), agrees, but cautions that the scoring algorithm "is weighted such that if you maintain that older account, you're better off because it goes to a pattern of payment history." Nevertheless, he says, if it's an older account that you don't use, and you're paying fees on it, "you're probably better off closing it out for privacy rather than credit score reasons."

There's at least one more nuance to consider, Hendricks explains. If you're intent on canceling a card, cancel a younger card or cancel one on which the credit card issuer doesn't report the credit card limit. "Some credit card companies don't report your credit limit," he says. "You can find out which ones by getting a copy of your credit report."

Number of cards matters. Your credit report may also alert you to another reason to cancel a credit card: You can have too many credit cards. Though there is no magic number -- again, because each person's credit situation is so different -- your credit report does give so-called reason codes for your credit score.

There are more than 40 reason codes -- reasons to grant or deny credit -- and up to four are given with your credit report to show what factors affected your score. The most common reason codes, according to Equifax, are as follows.

Most common reasons consumers are denied credit:

• Serious delinquency.
• Serious delinquency and public record or collection filed.
• Time since delinquency is too recent or unknown.
• Level of delinquency on accounts is too high.
• Amount owed on accounts is too high.
• Ratio of balances to credit limits on revolving accounts is too high.
• Length of time accounts have been established is too short.
• Too many accounts with balances.

One of the reason codes (reason No. 4) tells you if having too many cards has hurt your score. Common sense should tell you that the older you are and the better you manage your credit, the more cards you can have in your wallet before you reach the magic number that triggers the reason code (though you may be surprised to learn that 10 or more cards is not too high in some cases). "In any event, if you're in that rare category and have plenty of credit and low balances on the other cards, canceling a card may help you," Hendricks says.

Though canceling a card probably will not increase your credit score, holding on to one has a number of advantages. For one, Fair Isaac and VantageScore look for a healthy credit mix, a mix that might include a mortgage loan, a car loan, maybe a store card or two, three or four MasterCard or Visa cards and a home equity line of credit, or HELOC, for example.

HELOC effect of course, it's not simply a matter of having diverse sources of credit. They also want to see responsible credit usage on your part, including credit card balances in the healthy 30-percent-to-35-percent range. "That's a sign of an active and responsible credit person," Burns says. "On the other hand, if somebody consolidates their credit cards or revolving credit down to just a handful of credit sources and has high utilization rate, which will be detrimental to their score."

And this is where credit-score math gets fuzzy. Many consumers have consolidated outstanding credit card balances into a HELOC, both for the lower rate and because they thought doing so might help their credit scores. (For what it's worth, Fair Isaac's Watts wonders whether mortgage brokers, in an effort to generate more loans, first pitched the myth that canceling a credit card would help your score.) Once again, the answer is "it depends."

"Home equity lines of credit are really interesting creatures when it comes to credit scores," Watts says.

What's interesting is that it may make sense to consolidate credit card balances into a HELOC because Fair Isaac may treat the new HELOC as an installment loan rather than a revolving loan. However, Watts points out, that with Fair Isaac that only happens if the HELOC is a large line of credit. Small HELOC’s are regarded as revolving lines of credit, much like your credit cards. Thus, as with credit cards, it might help your credit score in some cases to close out a HELOC.

"But in all cases, paying down a real estate-based loan like a mortgage or a HELOC is going to help your score," says Watts.

And that seems to be the key to the kingdom when it comes to credit cards and credit scores: Don't cancel your cards. Pay them off. And after you've done that, don't send them back. Cut them up.

Do that, and you have a zero balance enhancing your credit utilization rate. Do that and you maintain your credit history on open accounts. Do that and your credit mix looks good. Do that, and you still have the available credit on the card you cut up. All you have to do is ask for a new card when you need it.

Nevertheless, if you have a compulsion to cancel credit cards, do it the right way. First, cancel your department store cards; then cancel the newest MasterCard or Visa with the lowest credit limit, making sure to close the card from the company that doesn't report credit limits.

"And make sure to keep your credit-utilization ratio in line as you cancel, paying down balances on your other cards, if necessary, to keep it in line," says Hendricks. Score one for the consumer.