What Should Your Credit Report NOT Have in Common with Paris Hilton, Keira Knightley, Kate Moss or Skinny Supermodels?

So much of the mainstream media focuses on famous painfully thin ... or almost anorexic ... public figures. We often glorify being thin and usually detest anything described as fat.

While fat can be unhealthy for your body, there is something you should understand ...

Thin is just not "IN" when it comes to your credit report. No, believe it or not, fat is actually good for your credit, your credit cards and your consumer debt.

There are many moving parts when it comes to managing that valuable asset know as your credit. The amount of history a credit report contains can have a huge bearing on your credit score.

According to the credit industry veterans and consultants, if you have only two accounts or just two credit cards you have a "thin" credit file. It is recommended that you keep at least three open and active accounts that have existed for at least three years. Active means activity has occurred within the past 6 months.

Not necessarily. It depends on what you think you'll need down the road.

Does it make it easier to borrow money later? Yes. Especially when purchasing a property using niche mortgage programs such as stated income, no documentation, zero down interest only, etc.

If you only have a two-account or "thin" credit history you may be at a serious disadvantage if something negative were to happen that is reported to your file, it could impact your score in a big way. One 30-day late payment might knock the score down 50 points.

Depending on how long your two existing accounts have been open, the damage from a single late payment may be more or less severe. If the accounts were less than a year old the overall picture would be worse than if both accounts were over five years old or more.

People with thin credit files need to pay extra attention to how they manage their payments and debts because there's very little room for error. One slip-up could spiral you down to a sub-prime borrower credit score level in some circumstances.

On the other hand, if you have a nice "fat" credit file with ten accounts open and active, you're in a position that could be more closely compared to a diversified stock portfolio.

If something were to happen inside one of your accounts, you'd have such a broad mix that the others would keep your scores from going too far south. Just like in the world of investing, if you have ten stocks and one goes down, the other nine are hopefully good enough to keep your overall picture in looking good.

Let's look at a real life example.

While these two friends are very much alike in many, many ways, they are different in one critical way ...

One is "Fat" and one is "Thin," and I don't mean one eats too much.

Let's see how this difference impacts their lives:

Linda and Tricia have been friends since college and are very much alike. They live in the same zip code. They travel together and buy a lot of the same things. Both have credit accounts over 5 years old and have always paid their bills on time. They also both have a credit score of 720.

After months of anticipation and planning, they go together on a long vacation to Europe. But during their fun trip, there was one important thing they left out of their travel plans.

They both forget to make a payment on their bills. Both women ultimately have a 30 day late notice reported on their credit files. Once they have been home from their trip for a few weeks, they both order a free credit report to take a look at their credit scores to see how much of a hit they took due of their oversight.

Linda's score, after the 30 day late, shows a respectable 690. Yet Tricia's score dropped all the way down to 630. (Wow ... 90 points!)

Why such a difference?

Linda had eight accounts and Tricia had only two open and active accounts. Because of Linda's "fat" credit file, she had more positive credit history to cushion the impact of the negative information. Tricia's thinner credit file had less history and therefore resulted in a bigger hit to her score.

Gary Novel, a 20+ year veteran in the credit industry, is a friend and colleague from Chicago who is an expert and consultant in credit file management. Gary frequently can be heard on financial radio shows and is known as the "Kredit Guru," which is a title that has been well-earned.

He says multiple open accounts provide a greater layer of protection for your credit report history. A "fat" file can also heal the wounds of a negative occurrence quicker. There's nothing wrong with only having two open and active accounts ... as long as nothing negative happens.

But when you keep so few lines in your credit, a late payment or a credit collection account can really send the scores out of whack compared to the fatter account with ten open active accounts. Unfortunately these things happen when you least expect them and sometimes without your knowledge.

This advice is certainly something to consider before you "close out" or eliminate your debt in an attempt to "manage" your credit. But don't run out and open a bunch of new credit to try to make your file fat! A lot of new activity, newly opened accounts and credit inquiries on your file will also impact your credit scores.

In fact, I was just reading an alarming statistic. According to an article recently appearing in the business section of the New York Times website, on average, "Americans under 35 years of age spend 16% more than they earn." Wow! If you find yourself in that category or care about someone in that group, getting a firm grip on what is being reported to your credit file is even more important.

So, what should you do? Move slowly and deliberately when opening any new credit.

• Be sure to keep any balances low compared to your credit limit.
• Pay off your entire balance monthly, whenever possible, to avoid interest charges.
• Always make your payments within the grace period to avoid extra late fees.
• Think twice before closing the accounts you don't use.

If you decide to open a new credit card account, be selective.

It's best to use a credit card instead of a checks, debit cards or cash, but when using a card for convenience, you should try to pay off the balance each month. This method, in essence, gives you an interest free loan for 30 days. You'll be more able to track where your money goes, and if you are selective when choosing a card, you could also receive some additional rewards.

Smart consumers have their credit card companies pay them by selecting a rewards card. You may choose points, miles, or cash back ... it's your decision, but don't take any card that offers less than 1% back (or 1 mile per dollar). Most often, you can even do better.

CitiBank has a card that gives you 6% back on purchases at the grocery or at gas stations, but only for what you charge in the first year.

American Express offers a card with 5% cash back on purchases made at the grocery, drug stores or gas stations and 1% on everything else. They also offer a card with a points program that let's you redeem your reward choices for retail purchases, entertainment or gift cards. The points one is called "Blue" and their website says the points never expire and there is no fee. The cash back one is called "Blue Cash."

Most cards offering larger percents back (like 3-6%) have a cap on their rewards. These two cards mentioned above with cash back, will reward you up to $1,000 back each year ... but that's the limit.

If you carry any balances on your cards, getting maximum rewards should not be your primary concern. First ... pay down your debt. A card with a $5,000 balance that is paid off with a $100 monthly payment would take you 9 years to pay off. What would that cost you? $5,100 in interest ... or double what you owe!

While it's a fair amount of work to do, you can try to reduce that expense by doing this little trick: ... do a balance transfer to a 0% introductory rate card and keep switching to a new card when the introductory rate expires. Your $100 a month payment would then make you debt free in less than half the time.

Here are two cards that charge no interest on balance transfers for the first 12 months and they offer rewards. They're both from Discover. The "Open Road" card offers 5% cash back for gas and auto expenses on the first $100 each billing cycle, The "More" card returns 5% cash back on travel, department stores, home improvement stores, clothing stores, gas, restaurants and movies. They both offer 1% cash back on everything else and 5% to 20% cash back on select retail purchases.

Check them out!

Yes, your credit is a precious asset and should be managed deliberately, just like you manage your investment assets.

Oh, and don't forget or overlook another huge asset that should be managed ... your home's equity. If you are a homeowner, on average, you are holding 67% of your total wealth in that single asset. Any financial advisor worth the letters after his name, would "freak out" if you told him you had 2/3 of your "eggs in one basket."

Translation? Traditional financial planning wisdom would consider it a risky strategy to keep 67% of your total wealth in a single place, investment or vehicle. This is exactly what the average homeowner does by keeping a large equity position in their home.

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