Our last post discussed the importance of having a high credit score in order to minimize credit card, mortgage and car loan interest rates. We also noted how low credit ratings can lead to higher insurance premiums in some states.

This post focuses on some of the various factors that have an impact on your credit rating. A recent Wall Street Journal article titled “Credit Scores: What You Need to Know” (September 9, 2009) outlined some of the common myths about your credit score.

First, the article points out, your credit score has little to do with your overall financial situation. It doesn’t reflect your income, assets or whether you pay your utilities or rent on time.

Secondly, paying off your credit card every month, while a good financial trait has no impact on your credit score. Nor does carrying a balance have an impact. One of the most critical factors is how much of the available credit you’ve used. The article points out that you need to keep your balance under half of your limit in order to minimize the effect on your score.

One of the most important factors, the article points out, is paying your credit card, car lease, and mortgage payments on time. A late payment can impact your score for up to a year. If you miss a credit card payment, pay it as soon as possible. Credit card companies typically wait about a month before reporting late payments.

It’s also recommended that you don’t close accounts you’re not using. Let the issuing companies close them instead. A long credit history of both open and closed accounts can help you.

Finally, the article points out that inquiries into your credit report can lower your score, even if you weren’t applying for a loan. When making large purchases, merchants may check your credit, so it may pay to ask about merchant’s policies and shop around to avoid unnecessary inquiries.

Paying attention to your use of credit can have a huge impact on your financial future. Keep the above facts in mind to help minimize your credit score.