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Know What Affects Your Credit Score

Here's how your FICO score is determined and how you can raise it

Here is what you need to know about each of these areas.

Payment history: 35 percent of your credit score
If you have no late payments in your credit files, that will have an overwhelmingly positive impact on your credit score since your payment track record is the single biggest determinant of your FICO score.

But even if you had one or two late payment in the past, all is not lost. The FICO scoring system takes "recency" into account in evaluating how responsible you are at paying your bills. Therefore, a late payment that happened three years ago won't have as much an impact on your credit scores as a slip up that occurred three months ago.

Bottom line: try to always make all payments on time. Even if you can only make minimum payments, this helps guard your credit rating.

Amount of debt owed: 30 percent of your credit score
When you're focused on eliminating your bills, you might think that debt is debt. But the credit scoring system doesn't treat all types of debt similarly.

The debt that can most likely lower your credit scores is credit card debt — not mortgages, car loans or student loan debt. So if you want to raise your credit scores, focus first on lowering your outstanding credit card balances.

As long as you make timely payments on your other debts, such as your home loan, having those types of debts won't negatively impact your credit scores in the way that existing credit card debt can.

Ideally, try to keep your credit card balances at or below 25 percent of your available credit. This is known as your "credit utilization ratio." If you can pay off your credit cards in full each month, that's even better.

Length of credit history: 15 percent of your credit score
All credit scoring models reward you for having a longer credit history. This can be a real plus to those age 50 and older, since you are likely to have a more established credit track record than someone in her 20s, 30s or 40s.

A word to the wise, though, about managing your credit cards in the context of your credit score. Even if you pay off a credit card in full, it's generally best to keep it open and not close the account. Closing credit cards can backfire on you, by decreasing the length of your credit history and raising your credit utilization ratio.

If you'll be applying for credit anytime in the next year, shutting down existing credit cards could hurt your FICO score. But if don't trust yourself with your credit cards, and they might tempt you, simply put them away — in the attic, basement, a safe or even the freezer!

Next: Why too many inquiries are a bad thing. >>

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