Good credit? Here's your reward

If you've been (mostly) an angel in managing your credit, you could soon get some props in your FICO score.

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By Walecia Konrad, Money Magazine contributing writer

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(Money Magazine) -- Finally, some good news about credit: Fair Isaac, the company that calculates consumer credit ratings for lenders, is rolling out a new formula that promises to favor responsible credit holders. Your FICO score could benefit.

Fair Isaac began working on the new system in 2006 - before the subprime mess even unfolded - in an effort to better differentiate "good risk" borrowers from "bad risk" ones and give creditors a more accurate prediction of default. A consumer in good standing could see his or her score go up by as much as 25 points under the new formula.

In this credit crunch, "you can be sure every point helps," says John Ulzheimer, president of educational services at If you're on the high end of a "fair" score (680 to 690), for example, you could be bumped to "good" and qualify for better interest rates.

It may take months for the bureaus to adapt. (Experian and TransUnion plan to implement the new formula soon; it's not known if Equifax will follow.) But here's what you can expect:

Occasional mistakes will be forgiven over time

If you are generally in good standing on several accounts and have a credit history of 10 years or more, one big mistake from a while back - such as a late payment of 90 days or more - won't mar your record as much as it used to. In fact, you could see a one-time boost in your score with the new formula.

The system treats such a slip-up as an "isolated delinquency," says Fair Isaac spokesman Craig Watts. So now you don't have to sweat it if, say, your Visa bill got lost and went unpaid when you moved a few years ago. Routine late payments of less than 90 days will still ding your record. As before, paying bills on time is the key to maintaining a high score.

Shopping around for a loan will hurt you less

Under the new system, multiple credit inquiries in a short period of time won't do as much damage as before - now they will be weighted less heavily in determining your overall score. The change is a reflection of the fact that the average person has more credit accounts and loans today than in the past.

One thing hasn't changed: "Borrowers still have a 45-day window on inquiries before their score could be significantly affected," adds Watts.

Having a few kinds of credit works in your favor

The new rules applaud borrowers who show that they can aptly handle a combination of revolving debt (like credit cards) and installment loans (like auto loans and mortgages). Someone with a solid credit history and a mix of well-managed loans should see his or her score go up.

Keep in mind, however, that if you carry balances near the max on revolving credit, you could be docked several points. The new system interprets getting close to your limit as a sign of bad debt management.

Best bet: Spread your balance out among a few cards, especially now that the rules don't penalize multiple credit applications.

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