Getting a good credit rating

Even though you don't want to be credit card dependent, we do live in a world where you need a good credit rating to buy property, new cars bigger items.

There are five factors that influence consumer credit scores. They are listed here in order of importance:

1. Payment History has a 35% impact. Paying debt on time and in full has a positive impact, and late payments, judgments and charge-offs have a negative impact.

2. Outstanding Credit Balances have a 30% impact. The ratio of outstanding balance to available credit is important. Keeping your debt below 50% of your credit limit is wise and below 30% is even wiser. It is never a good idea to close an account: the debt ratio will go up and the number of credit cards with seasoned lines will decrease. Hitting the maximums of available credit can be very negative. It may be worth calling the credit card company to ask them to increase your available credit to lower the debt ratio, provided they can do so without a "hard credit inquiry".

3. Credit History has a 15% impact. The length of time a particular credit line has been opened is important. A seasoned borrower is stronger. The biggest mistake that people make when attempting to improve their credit score is paying off and closing cards. Don't do it. When you close an old account your time average is reduced and it can also damage your score because the debt-to-available credit ratio is increased.

4. Inquiries have a 10% impact. Hard inquiries for credit will negatively impact the score. Auto and mortgage inquiries receive special treatment and 20 inquiries can be made in a 14-day period and be treated as only one inquiry. Each hard inquiry can cost 2 to 50 points on a credit score.

5. Type of Credit has a 10% impact. A mix of auto loans, credit cards and mortgages is positive, rather than a concentration of credit cards only.

See www.myfico.com for more information.

Barbara Bachelder, CFP® for Wealth by Design, LLC