Did you know that by closing unused credit accounts, you could lower your credit score? I am sure most of you believe it is a good idea to close credit that is not being used and for some that would be a good idea. However, for most, it is not. Why?

Because when you close unused credit, you are closing your good payment history. The length of your credit history is important as well. For those who want to lose that history, one that may include late payments, collections, or negative comments, closing the account will raise the score over time. However, if you have a good, lengthy payment history, it will most definitely lower your scores.

Okay, so now you are probably asking yourself “What is a credit ratio?” Divide the amount you owe on each card by how much is available on it. In other words, if you owe $500 on a $1,000 credit limit card, then that is a 50% ratio. Most creditors are looking for a ratio of 50% or less.

So, let’s get back to my client. How could she have avoided the humiliating and frustrating experience of being turned down for credit?

She had a 98% ratio on her one card and now knows that she would have been better to spread that outstanding balance over several cards, keeping each under 50%. She could still owe exactly the same amount, only to several creditors instead of just one.

We also need to have a good mix of credit. Just like an investment portfolio with a mixture of differing investments, you also want the same with credit. Do you have a mortgage, a car loan, a retail store card, and several credit cards? It is a balanced mixture that gives you the best scores.

Finally, we need to pay our debts on time. If we have been delinquent in paying on time, then most likely we will be turned down for more credit.

What have we learned from this nasty incident my client experienced? Know your credit history. We often make assumptions about our ability to secure credit. To understand your credit scores and manage your credit reports, you may need to absorb information that seems contradictory. Some of it is purposefully confusing, some not.

Educate yourself wherever you can on the principles and concepts of good credit usage and healthy scores. Each credit bureau (Experian, Equifax, and TransUnion) makes information available to help you, free for the asking. Our credit scores may be one of our MOST important assets! So, keep yours healthy

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Pleasant Hill, CA 94523
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E-mail: joan@silvassolutions.com