Friday, June 12, 2009

Credit Scores

An Important scenario to keep in mind:

Jane Doe was reviewing her credit and decided to close her 8 year old Visa account because she hardly ever used it and had other accounts available. The next month she found out that htis decision cost her 87 points on her credit score.

A consumer credit score is made up of five key components:

1. Payment history - 35%

2. Amounts owed - 30% (balances, debt ratio)

3. Length of Credit History - 15% (age of accounts)

4. New credit - 10%

5. Types of credit used - 10%

In the Jane Doe case, the card she cancelled was paid on time for 8 years, she didn't use it much but had a good history. Her other 2 cards were only a few months old and next to her mortgage, the card she cancelled was her strongest piece of credit.

Contrary to popular belief, credit scores do not penalize you for having too much available credit. It is better to preserve your credit score with 15 years of established credit history and old accounts in good standing than to have fewer and newer open accounts. Major bank cards have more impact than store cards.

Closing a credit card can greatly affect your credit scores; however, you may have no choice. Credit cards that are unused or rarely used can have their credit line reduced or closed without your approval by the credit card company.

Consumers beware!!!

....excerpts from Realtor Magazine

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