By Britt Scearce
Many think that their FICO credit scores are somehow assigned to them and do not change, but actually your FICO score is rather fluid. Your FICO credit score is based on a snapshot of what is being reported as of the moment that a particular credit report is pulled and it will fluctuate as the information in your credit report changes. The following are things that could change your FICO score:
Maxing Out Credit Cards
Utilizing too much of the available credit on your credit card accounts can have a significant impact on your FICO credit score. Total amounts owed accounts for 30% of your FICO score. It is generally recommended to keep credit card balances below 20% of their limits at any given time. The FICO scoring model takes into account the utilization of each individual credit card account, the utilization over all of your accounts as well as the number of accounts with a balance. For example, if you have five credit cards, each with a $2000 limit, you would have a total of $10,000 available credit over all five accounts. If you carry a $1000 balance on one of the five accounts you would be at 50% utilization on the card with the balance and you would have a 10% overall credit utilization rate over all of the credit available to you
Applying for New Credit
New credit accounts for 10% of your FICO score. It is recommended that you apply for credit only when needed and not at every retailer pushing their store card at check out for that special 20% off deal. One or two inquires when shopping for a mortgage, auto loan or credit card may not have a considerable impact. On the other hand, too many credit inquiries may negatively impact your FICO credit score since a hard inquiry can stay on your credit report for up to two years. The FICO model views people who are actively seeking credit as more of a risk to lenders than those who are not. Another factor to consider when applying for new credit is the length of time your accounts have been established, which accounts for 15% of your FICO score, so it is best to keep your existing accounts open as long as possible. Opening too many new accounts in a short period will affect the average age of your open accounts. According to FICO most “FICO High Achievers” have an average age of accounts of 11 years or more.
Payment history accounts for 35% of your FICO score, so it is vital that you pay at least the minimum payment on all of your accounts. The FICO scoring model takes into consideration the number of accounts with delinquency verses the number of accounts paid as agreed, the severity of delinquency, the time since the last delinquency and the presence of public records such as bankruptcy, judgments or liens. Even one 30 day delinquency could drop your FICO score dramatically and it could take months or years to recover. Consider the idea that paying your bills promptly not only a responsibility, but a priority considering all of the things affected in your financial life by your FICO score and credit report. Even paying only the minimum due can help when it comes to your credit card, mortgage, and loan payments. Consider automatic bill pay options or online payments, since many creditors and banks let you set up payment reminders via your account.
Although it seems counter intuitive, closing accounts, especially credit card accounts, will lower your available credit and potentially increase your debt utilization ratio, especially if you are currently carrying credit card balances. For example: If you have five credit cards each with a $2000 credit limit, which gives you $10,000 of available credit, and you are caring a $2000 balance one of your cards that is giving you the best interest rate and perks, then you would be at a 20% credit utilization ratio. Now, let’s say that you decide to close your other four accounts, which represent $8,000 in available credit to you. Then you would go from a 20% credit utilization ratio to a 100% credit utilization ratio, which would have a devastating effect on your FICO score, given that amounts owed and credit utilization account for 30% of your FICO score. It is best to keep accounts open as long as possible even if you transfer or pay off a balance to avoid lowering your available credit and damaging your utilization ratios.
Anatomy of the FICO Score
The FICO credit score takes into account a combination of all of the information found in your credit report. Your FICO score is made up of the following:
- Payment History – 35%
- Total Amounts Owed – 30%
- Length of Credit History – 15%
- New Credit – 10%
- Type of Credit in Use – 10%