A Brief Lesson on Credit Scores

• You credit score, the number that lenders use to determine your loan eligibility and interest rates, is determined by a number of factors. These include payment history, current debt owed, length of credit history, types of credit used and new credit.
  
  Payment history makes up the largest portion of a credit score (about 35%) and has to do with the number of late or skipped payments on past accounts. Paying all bills on time can greatly improve this section.
  
  Current debt owed makes up 30% of a credit score and involves the amount of money currently owed to creditors, usually expressed as a ratio of current money owed to total money available to borrow (the credit limit). Generally, this means that the higher the percentage of the credit limit used, the lower the credit score.
  
  Length of credit history makes up 15% of the total credit score and has to do with how long a person has been using credit. Someone who's never had credit before will generally have a low score because of this factor.
  
  Types of credit used and new credit each make up 10% of the total credit score. Types of credit deals with how many credit cards, loans and mortgages have been used in the past (banks generally like to see a good variety of different types of credit). New credit involves how many new credit accounts are opened at a time. Opening a lot of credit cards or taking out a number of loans all at once can signal that a person is about to incur a lot of debt very quickly.
  
  

Canceling Credit Cards

• Because of the current debt ratio described above, canceling a credit card after it's been paid off is not usually a good idea. When you have a paid-off credit card, the total unused credit available to you is greater, and the debt ratio is lower. This is a good thing as far as credit scores are concerned. Canceling a paid-off credit card eliminates this unused credit and thus hurts this ratio.
  
  It is best, in this case, to not cancel any credit cards until all of your cards have been paid off. (If you must, hide or cut up paid-off credit cards so they cannot be used until everything has been paid.) Once they're paid off, cancel all but one or two of the cards. Continuing to use the remaining cards in a responsible manner by only making purchases that can be immediately paid off will help raise a credit score by lengthening credit history and avoiding late payments.
  
  If you don't think you can commit to this kind of disciplined spending, canceling all credit cards after they've been paid off is probably the best option. Remember, payment history makes up the largest percent of a credit score. If you don't spend more than you can handle, you'll be much less likely to make late payments and damage this crucial secion.