Personal Finance Tip of the Week, By Financial Fundamentals, LLC of Watertown

​Managing your credit is a very important personal finance activity, given the range of influential parties that can access your credit file. Lenders, current and prospective employers, landlords, utility companies, and insurance providers may all form an opinion of you based on your credit report and score.

Given the stakes involved, it is critical to understand what does - and doesn’t - impact your credit score. You want to focus your credit management efforts on the areas that matter most.

Let’s start with the areas that do have an impact. The information you see in the Accounts, Public Records, and Inquiries sections of your credit report can all influence your score. In particular, all of the following items flow into your credit score:

• Open account details, including your balance and payment history, plus some of the key characteristics of the account, such as the type of loan and the credit limit. The number and mix of open accounts also have an impact.
• Closed account details, but only if the account had derogatory history, such as late payments or collections.
• Public records, such as a bankruptcy filing, judgment, or tax lien, whether they are still outstanding or satisfied.
• “Hard” inquiries that have occurred over the past 12 months. Hard inquiries are ones where you have asked a lender for credit.

This list explains why it is so important to maintain positive activity on your open accounts, dispute or resolve any accounts that show negative activity, and limit your requests for credit.

Next, let’s review the areas that don’t have an impact:

• On-time payments made to a landlord, medical provider, or utility company. These service providers will generally only report late payments.
• Closed account details, if the account was in good standing.
• Certain open account details, including the monthly payment amount and high balance.
• Your demographic information, such as your age, gender, ethnicity, education, marital status, address, income, or employer.

This list can help you prioritize your credit building activities. For example, you need to manage your payments to landlords, medical providers, and utility companies to proactively avoid having any negative information flow onto your credit report. Also, you need to think twice before closing an account in good standing, since it will no longer have a positive impact on your score. In some cases it may be more advantageous to keep the account open, or in the case of an installment loan that matures, re-open a comparable account.

But you don’t need to actively manage your demographic information, unless it is clearly wrong. For example, the name, address, and Social Security number on your credit report should all be correct. If not, you should notify each of the three national credit bureaus and ask them to correct the information. You can do this online or in writing.

Credit management should be part of your regular personal finance routine. To make it as easy as possible, focus your efforts on the activities that will have the greatest impact on your score.

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Stephen Barkhuff, CFP(R), CFA, MBA is the founder and president of Financial Fundamentals, LLC, based in Watertown, MA. Financial Fundamentals helps couples and singles with modest incomes take control of their financial future. You can reach him at mailto:SBarkhuff@FFundamentals.com.