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Wednesday, January 24, 2007

Understanding Your Credit Rating

Do you understand the facts about credit scoring and how it can affect you financially?

I received the following information from a mortgage broker friend, Deep, the other day and thought it best be shared. Though this reflects American policies, my hunch is that it's pretty standard to most other countries, too.

When it comes to creating balance in our lives, focussing on our financial care deserves serious attention as well! Richard and I have not included a chapter in our Work and Life Balance eBook about money (because that is not our area of expertise to guide you in), but it really deserves attention in our lives. Here's what Deep says;

"Often client's are surprised by their perfect credit "history" but lower than perfect credit scores. Understanding what comprises credit scores, will help you maintain the best scores possible.

**35% of your score is based upon payment history. The more recent and derogatory the late payment, the more negative effect it has on the score. Missing low payments is better than missing high payments. So, if you missed a $40 per month payment, it won’t have as negative an effect as if you missed your car payment of $650.

**30% of scores are based on debt ratio. This is tricky - it measures the balance on a debt compared to the high limit available, particularly on revolving debt. Ideally, you want to keep your balances below 10% of the available credit limit. Therefore, you are better off spreading your balance over a few cards than having it all on one card.

**15% is comprised of the length of credit history. This means you want to hold on to old credit cards, even if the rate is not good. You are rewarded for having long-term credit card debt.

**10% is based on credit type. A good mix is always best—an auto loan, a mortgage payment, a few credit cards, etc. Three to five is desired by scoring.

**10% of your score is based on inquiries. Scores are only reduced for the first ten inquiries. Once you get to 10, you might as well go out and get 50 because it won't make a difference.

It's important to understand why scores are what they are and how to improve them or avoid lowering them. With some small changes, you can improve and maintain your scores. Great scores are 720 and higher."

Every person is advised to check with the credit bureau once a year to make sure that their financial records are up to date and accurate. Keeping our credit rating in good shape is really important!

Thanks for this information, Deep.

Warmly, Carolyn
Inner Fitness(R) Programs

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