Most individuals attempt at one time or another to figure out what affects their credit score and what does not. Unfortunately, there is considerable confusion partly due to the complexity of the calculations and partly due to misinformation concerning what is included in the score. There are several factors most would think are included in the calculation of the credit score but actually are not. The following items have no direct impact on your credit score consequently there is no need to stress over these items:

• Your employment or income – There is no relationship between whether you are employed and your credit score although it would be difficult for you to pay your bills if you are not employed or did not have a source of income. Making timely payments is important but not where your money comes from or how much.
• Making only minimum payments on your credit cards – This is an extremely bad idea from a financial aspect considering all the interest you would pay but only making the minimum payments on your credit cards does not affect your credit score.
• The amount in your checking or savings account – While it is important to have sufficient money set aside for an emergency the amount you have has no impact on your credit score. Not having any money has no impact on your score as long as you pay your bills on time.
• Your age – Other than the fact an older individual has had more time to build a history of responsible credit use; age has no direct impact on an individual’s credit score.

While the above factors do not directly impact your credit score they can indirectly. If you have no source of income, paying bills on time even the minimum payments would be problematic if not impossible. As stated previously, do not stress over these items but if you continue to pay all your bills on time and don’t use over 30% of your available credit you will not have to worry about your credit score!

Following the same train of thought as a recent post concerning establishing or improving your credit, there is one common mistake many people make – closing paid-off credit card accounts; particularly, accounts which have been open for several years. According to some credit experts, based on your individual financial situation, closing credit accounts could be the largest credit mistake you did not realize you were making!

Many individuals are under the misconception that once a credit card is paid off it is better to close the account rather than taking the chance you might have a weak moment and use the card again. If this is a concern, place the card in a location which would be difficult or time consuming to access. I have several friends who actually placed their paid-off credit card in water then froze it to ensure it would take some effort to be able to use that particular card. I personally would not go through that much effort just to prevent myself from using a card so I just removed the card from my purse and placed it in a small fire safe. I did however make a notation on my calendar six months in the future to use the card for a small purchase. This ensures I am able to keep the card active so the issuing company will not cancel the card due to inactivity.  I am a firm believer in using each of my cards approximately every six months for a small purchase to keep the card active then paying the card off when the bills arrives so no interest is accrued.

The reason not to close a paid-off account is due to the fact approximately 30% of your credit score is based on a ratio called the credit utilization ratio. This ratio is comprised of the relationship between your available credit and the amount you have used or utilized thus the name utilization ratio. Closing a paid-off card will reduce your available credit while the balance owed on your other cards will remain the same. For example, if you have $16,000 available between three credit card accounts and you currently owe a balance of $4,000 on two cards your utilization ratio is around 25%. If the paid-off card has a $10,000 limit and you close that card, your available credit is now $6,000 and your utilization ratio immediately jumps to 67%. This will definitely hurt your score.  The ideal ratio is under 30% as any percentage over 30% will hurt your credit score.

It certainly is an excellent idea to pay off credit cards to reduce debt but rather than immediately closing the account find a method to help you to avoid the temptation of using the card again but do not close the account and in the process hurt your credit score! Credit is an asset which must be used wisely to achieve your goals while maintaining financial security.

Most individuals would like to know how to easily and quickly improve their credit score but there is no quick fix to improve a credit score. Unfortunately, there is considerable advice meant to help which may actually harm the score. Credit scores are based on several factors some of which are relatively easy to understand and some appear to be shrouded in mystery. The following tidbits of advice when examined carefully are usually found to be detrimental to a credit score rather than helpful.

Requesting a lower credit limit can harm your credit score as it reduces your ratio of what you owe to your available credit. This ratio is termed your utilization ratio and approximately 30% of your credit score is based on this ratio. Taking the opposite approach of opening several new credit cards in an effort to reduce this ratio is not effective as numerous credit inquiries and newly established credit can actually lower your score. This action effects the age of your credit history which comprises roughly 15% of your credit score. Any new credit cards when averaged with your older cards will reduce your overall average credit card age. Almost as detrimental to your score is not using one of your older credit cards and taking the chance the issuer will close the account. Losing an older line of credit from nonuse will hurt your utilization ratio as well as reduce your average credit card age. To overcome this possibility, most credit experts recommend using each of your cards at least twice a year then immediately paying it off. This action will usually keep the issuer from closing the account yet not cost you any interest.

Another typical piece of questionable advice is paying off an installment account early particularly if the interest rate is lower than one of your credit card rates. This action raises your utilization ratio as once an installment loan is paid off the account is closed thus reducing your available credit. If you have any extra money, it would be much better to pay a credit card with a high interest rate.

Negotiating with a lender to settle your debt for a reduced amount might be advantageous to your overall debt load but it must be done in a particular manner to avoid harming your credit score. Part of your negotiation must be getting the lender to agree in writing to report your debt as “paid in full” as opposed to “settled for less than the balance”. Settled indicates the lender had to take less than the amount owed which typically harms your credit score. Additionally, if potential new lenders view the term “settled for less than the balance” on your credit report they might be concerned you are a credit risk as you did not fulfill a prior lending agreement.

Before taking any advice meant to help you improve your credit score, examine it carefully to ensure that following the advice will actually help rather than harm your score. The one piece of advice proven to help increase a credit score is always paying on time as 35% of your credit score is based on your payment history.