How is my Credit Rated? Part 3

As part of the five part series on credit rating Michelle Luker takes a moment to look at the third largest weight on our credit.

First let’s take a moment to recap. In the first two parts of the series we found out the following:

• 35% of the score is based on how you handle your debt obligations

• 30% of the credit score is derived from your revolving balances carried on accounts as they pertain to your debt utilization ratio.

In Summary we learned that paying our bills on time mixed with a healthy balance of debt makes up 65% of our score. That is 2/3 of what makes up our credit rating. That leaves three remaining items that comprise only 1/3 of our score. Now don’t make the mistake of minimizing the remaining three factors in the series because they are only a small portion. So the third important factor in our credit score rating is the following:

• 15% of the score is derived from the average length of time you have had credit.  The longer an account has been open, the better.  Never close a credit card account; leave it open with a zero balance.  You actually reduce your score by closing older accounts as your average account age will not increase in the future as quickly.

Two things can happen when you close an old card. Your debt utilization ratio which we learned about in the second part of the series is decreased and the average length of time accounts have been established is also decreased. So two things are happening from one simple action that we believed would be for the best. The trick though is too make sure the cards get used because if they go unused forever without activity it will decrease the overall impact of the card. After all it is a credit rating and that would require credit to be used.

New accounts obviously can only grow in strength over time. Many times when you pay off a mortgage or car note that you have been paying on for a long time your score will go down. Then the new debt is added. Two things have occurred the auto loan is paid and closed and the new debt has no history of payment. So you can see how this works.

Again, I want to thank Michelle Luker for stopping by California Home Strategies to offer some advice on Credit. We greatly appreciate your presence and the fabulous information that you have provided us.

For any specific credit questions do not hesitate to contact Michelle directly.

Office: 916-652-9637 Cell: 916-316-0247 Fax: 916-644-6626

Capital Credit Source, Inc. 4804 Granite Drive, Suite F-3261 Rocklin, CA 95677