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As disheartening as it has been to see your credit score decline, don’t close out your jewelry store account. Your score probably dropped — after opening that new account and charging the engagement ring — because you have a relatively thin credit file, and not much information in your credit reports on which you can be evaluated. By opening that jewelry account, you generated an inquiry on your credit report, which undoubtedly impacted your credit rating. Inquiries account for 10% of your FICO credit scores. Inquiries stay on your credit files for two years and they count against your FICO score for 1 year. So just concentrate on paying down your debts and making all payments on time on both cards, as you have been doing. These two strategies will definitely boost your credit scores over time. But if you cancel the jewelry store card – now, or in another 15 months or so — you risk doing further damage to your credit. Read on to discover why.

How Your FICO Scores are Calculated

There is a lot of misinformation about what goes into your credit score. However, Fair Isaac officials have said many times that this is the heart of what happens: Your credit files – currently those from Equifax and TransUnion – are reviewed. Certain information (roughly 22 items) about how you’ve managed your credit is statistically analyzed. Ultimately, five different categories are weighted to produce your FICO score. Here is the breakdown of those five areas that contribute to your FICO score:

The Formula That Governs Your FICO Score

1.    Payment History: Approximately 35% of your score is based on this category.
2.    Amounts Owed: About 30% of your score is based on this category. (Mainly, you’re evaluated based on how much credit card debt you have).
3.    Length of Credit History: Roughly 15% of your score is based on this category.
4.    New Credit or Inquiries: Around 10% of your score is based on this category.
5.    Types of Credit in Use: About 10% of your credit score is based on this category. (Having a good mix of credit in your credit files is viewed favorably, although some forms of debt, such as mortgage debt, is scored more positively than other forms of debt, like department store cards or furniture store cards).

Based on this information, as well as other advice FICO freely disseminates on its website (www.myfico.com) and elsewhere, you can draw some good general conclusions about what actions can help your credit – and what could hurt it. For example, to increase your credit scores:

Pay Your Bills on Time

• Payment track record is the largest component of your FICO score
• Even if you must make “minimum” payments, do it!
• One late payment can drop your FICO score by 60 to 110 points

Maintain Low Credit Card Balances

• Don’t “max out” any cards
• Try to not to use up too much of your available credit limit
• Spread out debt over several cards instead of carrying big balances

Keep Your Older, Established Accounts Open

• Longer credit history is scored favorably
• Resist the urge to close an account when you pay it off
• Closing accounts can sometimes lower your FICO credit scores

If it was just a matter of evaluating the wisdom of using your life insurance to pay off your charge card debt, I would be inclined to tell you that it would probably be a smart move. However, there is a big wrinkle in the whole equation: namely, you stated that your job is ending soon. Normally, I would have counseled you to seriously consider paying off the debt quickly while you can – especially since taking a loan from your whole life insurance policy should have no tax consequences to you. However, the bigger issue is your looming unemployment status.

Use Insurance as a Cash Cushion in the Future

If you don’t find another job or a replacement contract, you will have to consider how you will pay all your normal monthly obligations – housing, food, utilities, transportation, and so forth. I assume you have little to no savings (or some of that likely would have paid the debt already). Unfortunately, it is taking people longer than ever to find jobs. And with 10% unemployment, 1 out of 3 job-hunters has joined the ranks of the “long-term unemployed.” This means they have been out of work for at least six months. So given the current economic environment, and the fact that your credit card debt is carrying an extremely low interest rate right now, I would suggest continuing to pay on that debt as aggressively as you can, but don’t yet tap the cash value of your whole life insurance policy. Keep it untouched for now, as a standby cash cushion that you can access in the future if things get especially tight and you can’t easily replace your income.