It’s important to keep old revolving accounts open, even if you are not using them. 15% of your overall credit score is determined by the length of history. If you close the accounts that you have had for a long time, you will shorten your credit history, thereby lowering your score.

30% of your score is determined by your balance to limit ratio. The higher the balances you are carrying in comparison to your credit limit, the lower your score will be. The credit bureaus recommend keeping your balance to below 30% of the total available limit. If you close accounts, you are lowering your overall credit limit, again, causing a negative effect on your score.

Banks and credit card companies are not making it easy. They have begun lowering credit card limits in the past couple of years, which has automatically made the balance-to-limit ratio higher for anyone carrying balances on their cards.

The government is putting limits on how much the banks and credit card companies can hike up their rates that will take effect in February. Because of this, they are raising their rates now. You have probably received a letter from your credit card companies informing you of the rate hike and giving you a choice to “opt out”. The letters state that if you “opt out”, your rate will not be raised, but your account will be closed. Please keep in mind how this will affect your score when deciding whether or not to keep your account open. If you have had the accounts for a long time and they have a substantial credit limit, the effect on your credit score could be dramatic. The best option would be to transfer the balance to another account, or pay it off if possible, and keep it open.

Navigating the credit scoring system is quite a task these days. The best way to keep a high score is to use each card frequently – at least once every 2 months, but pay the balance off in full. And whatever you do, don’t close old accounts!

Your credit score is made up of 5 components.

1. 35% – Payment History
a. On-time payments
b. Length of time that has passed since the most recent negative item

2. 30% – Credit Balance to Credit Limit Ratio
a. Keep your balances below 30% of the available limit

3. 15% – Length of Credit History
a. The longer the history, the better

4. 10% – Type of Credit
a. Ideal credit profile consists of 3 – 5 revolving credit cards, a mortgage account, an auto loan, and a line of credit

5. 10% – Inquiries
a. Inquiries stay on the report for 2 years but only affect the score for 1 year
b. Auto and mortgage inquiries occurring within a 45 day period are treated as 1
c. Many inquiries don’t count: personal, promotional and job related, insurance & account reviews

Whatever you do, be sure you are making your payments on time, especially if you plan on applying for a mortgage in the near future. The recent history carries the most weight – a 60 day late from 1 year ago will not have as much negative impact on your score as a 30 day late 2 months ago. When applying for a mortgage, your credit history from the most recent 12 months will have the most weight and impact on your score.

These days keeping your credit score as high as possible is more important than ever. Just one point can make a difference in your interest rate, costing you thousands of dollars over the life of your loan, or even stop you from qualifying all together.

Each Friday I’ll be posting a credit tip of the week, highlighting important facts that can have an impact on your score.

Today’s tip is about collections and judgments:

If you have any outstanding collections or judgments, they will come off your credit report after 7 years. If they are still appearing on your report after 7 years, you can simply contact the bureaus that are reporting them and provide them proof of the original date to have them removed. However, if the debt is owed to the government on any level, including child support and student loans, the debt can remain indefinitely. Surprise, huh?!

All three bureaus can be contacted online at:

www.experian.com

www.transunion.com

www.equifax.com