In general, I recommend against putting purchases on a credit card if you don’t have to. Even if you can pay off an expense immediately, it’s pretty easy to forget and let a balance slip over until next month. But it’s probably worthwhile to go out and charge something if you haven’t used your card in a while. I’m not suggesting that you go crazy with the plastic, mind you: just swipe for something small and pay off that balance immediately.

There’s a reason I’m encouraging a little consumerism right now. Many credit card companies are closing accounts that haven’t been used recently. For most people, that’s a card that they’ve had for a long time and don’t use because it has the worst terms, because they opened the account when they were first establishing their credit. I know I’m in that boat: I have a credit card I got when I started college. The interest is insane, so I never use it. I would close that account myself, except it’s a major part of my credit history.

When you or your credit card company close an account that you’ve had open for a long time, your credit score is likely to take a hit. Depending on how much of your credit history that card is, the ding to your credit score should be minor — but it can be a major issue if you are applying for a loan in the near future. In most cases, there just isn’t anything you can do about an account closure after the fact. You can ask your credit card company to reverse the closure, but such reversals are very rare.

Another option — one that is a little more likely to happen — is that you can ask your credit card issuer for a new card with the same terms as the now-closed account. Your credit score will still be lower, because your credit history will still be shorter. However, you won’t be penalized for having less credit available to you — another major factor in computing your credit score. The status of your other credit cards may play a role in determining whether your credit card company will offer you a new line of credit: it is possible they won’t. However, you’ll still have a better chance than trying to get the company to reopen your old credit card.

It’s only ‘inactive’ cards that are facing closure — those credit cards that haven’t been used in several months. You can keep all of your cards active by making a charge every month or two. If you’re carrying a balance on your credit cards, this is one credit card issue you don’t have to worry about. Even if you’ve stopped making new purchases, as long as you keep making payments on your cards, they’ll still be considered active.

Credit card companies are stepping up such closures, in part to reduce their own liability. Even if you aren’t using all of your credit, it’s still a liability for credit card companies — especially during a time where more and more consumers are struggling with debt.

Popularity: 14% [?]

Your FICO score is the key factor in whether a company will extend you credit, whether you’re applying for a credit card at your local department store or applying for a mortgage for a new house. There are entire books on how to improve your FICO score and complex strategies for managing it. All that means that even a small change in how the Fair Isaac Corporation (the company responsible for FICO scores) calculates your score can be a big deal. The fact of the matter is that Fair Isaac is planning some big changes for 2009.

Starting at the beginning of the year, FICO scores will be calculated based on a new formula. The change is partly based on the increased abilities of technology meant for tracking consumer spending, as well as the fact that more consumers have credit available to them than when the FICO score was created. Fair Isaac Corporation will use the new formula to better describe and rank credit problems. In tests, the new FICO scoring system was able to predict defaults 5 to 15 percent better than the older model.

There will be several key changes that are likely to change your credit score. For one thing, the new formula offers a little more forgiveness for someone who has only one missed payment, as long as it’s isolated. In the past, a FICO score focused on the number of accounts a person had open and the amount of credit already available to them. The new formula will focus more on the balances actually carried on a consumer’s accounts.

One key technique for improving a credit score will go out the window with the new FICO score: piggybacking, or allowing someone with lower credit to be added to an account in order to improve their credit, will be harder to do. Typically used by parents who add their children to an account in order to jump start their credit history, the practice has been heavily abused in recent years by individuals with high credit scores selling their names. The reduced benefit to authorized users of accounts will cause some problems, according to Kiplinger: “…many of those authorized users are women. Many of them rely on their husbands’ FICO scores, and it will now take longer for those women to build up their own credit scores.”

Equifax and TransUnion will be switching over to the new system over the course of 2009. There’s no word yet on whether Experian will be making the switch soon.

In part, Fair Isaac’s change is in response to the current economic situation: lenders were unsure of the reliability of credit scoring models. That, combined, with their own economic issues, caused lenders to severely limit the credit they’re willing to offer. There is some hope that with a more reliable method of predicting defaults, lenders will increase the credit they’re willing to offer.

The FICO reconfiguration is a case of good news, bad news. For some consumers, the new formula will spit out a higher credit score. For many others, it’ll offer a lower score. But, either way, credit will be at least a little easier to get than it has been of late.

Popularity: 15% [?]

Banks and lenders are working hard to cover their own tails. They’re reducing credit limits even for reliable customers on everything from HELOCs to credit cards — even on customers with excellent repayment histories. The Wall Street Journal reported last week on American Express’ changes, looking at one couple in particular: John and Monica Bell, of Pennsylvania. The Bells previously had a card with no limit, on which they never carried a balance. On average, they would charge approximately $5,000. American Express imposed a $1,100 credit limit on the Bells recently:

AmEx customers who pay with plastic at the same places where Mrs. Bell shops and have the same mortgage lender have poor repayment histories, according to a letter sent by AmEx.

“They’re holding me accountable for someone else’s credit,” fumes Mr. Bell, a real-estate agent in Chadds Ford, Pa. His mortgage loan came from Countrywide Financial Corp., now part of Bank of America, and his wife uses the AmEx card at retailers Wal-Mart Stores Inc. and the Marshalls unit of TJX Cos. and to fill up her tank at Sunoco Inc. gas stations.

It’s not just American Express who’s cutting limits, though. And those shrinking limits can wreak havoc on your credit score, even if you aren’t carrying a balance. Credit scores are partially based on the ratio of debt you have to the debt you could have. Your credit limit marks the amount of debt you can afford — that you could have. If that number suddenly drops, so does your ratio.

Even worse, there’s no law stopping credit card companies from dropping your credit limit below the amount you currently owe. If that happens, you can get hit with overage charges immediately. The only protection you have against those sorts of fees is to carry only minimal balances. If you spot such a change on your credit card statement, it’s more than worth your while to call up your credit card company and ask to have your credit limit raised at least to the same level as your current balance. You can also ask to have the charges removed, but there’s no real guarantee.

Some credit card companies have gone so far as to cancel credit cards. While that seems mostly focused towards accounts that haven’t been used in a while, they do seem to be targeting individuals with high balances, especially if they live in areas hit hard by the housing downturn. That group is considered especially risky right now and have also been a significant portion of the credit card accounts with lowered balances or higher interest rates.

Remember, your bank or credit card company does have to notify you in writing of any changes they make to your account. This is a time to be especially diligent about opening your credit card statements, as well as any other mail you receive from your lender. I know more than a few people who just shred their bills, especially if they pay online. Now is probably not the best time to be using that method.

Popularity: 16% [?]

When you’re looking at your credit report, depending on which of the three companies provided it to you, you may see your FICO score — a number between 300 and 850. But it can be difficult to understand just how that number corresponds to your credit score.

Your FICO score, or credit score, is based on the information in your credit report. It’s a sort of analysis of your payment history, ability to pay off credit and comparison to how other people have done in similar situations, all rolled into one little number. And that one little number can mean a big difference if you’re looking for a mortgage or other credit.

The problem that you may run into with a low FICO score is that FICO scores are all about making lenders’ lives easier. No matter whether you had some sort of extenuating circumstance that led to a low FICO score, you won’t even have the option of explaining it away to a lender. Instead, it’s up to you to raise your FICO score.

Unlike credit reports, which can show past mistakes, FICO scores can be relatively easy to repair. While you can’t raise your score overnight, you can bring it up. And when a lender looks at a FICO score, rather than your credit history, they don’t see how long your FICO has been at a certain level. In a way, FICO scores can even the playing field.

To improve your FICO score, you will need to take some steps to generally improve your credit:

• Make paying your bills in full and on time your priority. Late payments and outstanding bills significantly drag down FICO scores.
• Pay off credit cards — but don’t close your cards after you’ve paid them off. A high ratio of credit available to credit used can raise your FICO score.
• Give it time. You’ll need positive credit history to bring up your score, which is one of the reasons it’s hard for young people to get high FICOs.
• Don’t apply for any new credit. Sure, you’ll need to apply for that mortgage you’re aiming for, but limit your other credit: no new cards or accounts. The folks figuring FICO scores assume that if you’re looking for a lot of credit at one time, you’re in some sort of financial difficulty.

Lastly, building up a respectable FICO score can take some time. If you’re planning some big purchases in the future — like a home, start now! It may take a year to get your credit to the level you’ll need to get a decent mortgage. And once you’ve got your FICO up, make the commitment to keep it up. Keep up on your bills and financial commitments to keep away worries about FICO scores and credit reports.

Popularity: 18% [?]

No matter what your financial situation is — whether you’re getting ready to purchase a home or you’re working on getting out of debt — you should have a good idea of what’s on your credit report. Because your credit report is the key factor for lenders trying to decide just how much credit they’ll extend to you for mortgages, credit cards or car loans,not knowing your credit report can set you up for a nasty surprise.

As long as you live in the U.S., you are entitled to a free copy of your credit report every year from each of the three main reporting agencies (TransUnion, Equifax and Experian). And to make the process easy, all three reports are available through the same website: AnnualCreditReport.com. You can also obtain your credit report through a toll-free number or a mailing address available on the site. AnnualCreditReport.com is the only site that is actually required to give you a free copy of your credit report: there are hundreds of other websites available online that offer to do the same thing, but most of them are effectively scams — they require you to sign up for other services to get a free credit report or use other techniques to get money from you.

To receive a credit report from AnnualCreditReport.com, you’ll need to provide some personal information (including your Social Security number) and answer a series of questions about your past credit, such as what car you owned at a given time, in order to prove that you are, in fact, you. This system is intended to protect your credit information. If you can’t answer all credit questions correctly — and don’t worry if you can’t; I couldn’t and there wasn’t anything wrong with my credit — you’ll be asked to provide some further information via mail.

I don’t recommend getting all three credit reports at once — instead, you can, in a way, game the system. I get a credit report every four months: TransUnion in January, Experian in May and Equifax in September. This way, I have a good idea of what’s happening with my credit year round. Not all of my credit activity shows up on all three reports because some lenders report to only one or two, but I still have a general picture.

When you receive your credit report, you should check it over and make sure that you recognize each item on the report. If you find an item that you need to dispute, you will need to contact the credit reporting agency to both file a dispute and to request a fraud alert to be placed on your file, if you feel that you may have been a victim of identity theft.

Popularity: 22% [?]