Keeping your high credit score (or improving one that's not so good)

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Last week we talked about the utilization ratio, the amount of your outstanding debt divided by the amount of total available credit, and the importance of using credit cards and lines of credit since banks are closing unused accounts. This was important because when an account is closed, the utilization ratio rises, which has a downard effect on your credit score. This week, let's examine other ways to protect your credit score.

Your credit score depends on several factors:

Payment history about 35%
Amounts owed about 30%
New credit about 10%
Utilization ratio about 25%

The portions are given as estimates because there are actually three slightly different credit rating agencies, and they have proprietary formulae.

Knowing the factors can help you to determine how to support or raise your credit score. For example, paying down debt and making payments on time always helps. That's because your payment history is the most important factor in determining your credit core.

But taking out new credit can work for you or against you, depending on the circumstances. Last week we talked about how important it can be to use credit lines and credit cards regularly, and then pay them off at the end of the month, in order to keep the credit available and maintain a low utilization ratio. Normally, new credit will reduce your credit score somewhat. But if a bank recently reduced your credit line or closed an account due to inactivity, then opening a new account can help your score because new credit is a less weighty factor than the utilization ratio.

If you find yourself in some financial difficulty, it's good to be proactive. Begin working with a credit counselor before you fall behind on payments. They are more likely to be able to negotiate a lower rate than you are personally, making it easier to keep payments current. Though your credit report may disclose that you are working with a credit counselor, that fact won't affect your credit score so long as the payments arrive on time.

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