How Credit Card Use Affects Your Fico Score

I was doing a little research recently that revealed thebut it has been receiving increased emphasis since
average middle-class American household carries2009. It may even replace your payment history as
between $6000 and $11000 in credit card debt,the largest single factor.
depending upon who you choose to believe. EachTo Close Accounts or Not
household also had an average of 5.4 credit cards. InThis gets back to the last point in the previous section.
2006, 173 million Americans were credit cardholdersIf you have paid off a credit card, do you close the
and that number is expected to increase to 181 millionaccount or not? The answer will vary from person to
by 2010.person. If you have the requisite self-control to not
As you know, your FICO (Fair Isaac & Company)charge that card up again, I would say keep the
score is a used as a prime indicator of your creditaccount open. If not, then it would be wise to close it.
worthiness and plays a crucial role in your ability toHere is the reasoning. Assume that you have 5 cards
obtain credit. This includes anything from credit cardswith $2000 limits for $10000 total available credit. Say
to auto loans and home mortgages. As potentialall 5 cards have balances of $1500. Your outstanding
lenders view it, the higher your FICO score the betterbalance on all cards is $7500 and your credit utilization
risk you are when it coming to extending credit. Ais 75% ($7500/$10000 x 100 = 75%). No too good,
higher score indicates a higher likelihood of repaymentright?
while a lower score indicates a lower likelihood. WithNow you come into some money and and wisely
so many Americans holding so many cards andchoose to pay off 1 of the cards. Now your
carrying such large balances, it is important tooutstanding balance on all cards is $6000 and your
understand exactly how credit card usage, or misusecredit utilization is 60% ($6000/$10000 x 100 = 60%).
as the case may be, may affect your FICO score.Better, huh? Choose to leave this account open and
Here are a few things you should know.you should see a nice little bump in your FICO score.
Make Your Payments on TimeBut if you choose to close that account, your total
This may seem like stating the obvious but theavailable credit is now $8000. You still owe $6000 on
importance of making your payments on time cannotthe other 4 cards but now your credit utilization is still
be overstated. Your payment history is the single75% ($6000/$8000 x 100 = 75%). So you have less
largest factor used (about 35%) to determine yourcredit available ($8000) and that is 75% utilized.
credit score. Payments made 30 days or more lateChoose this option and you may well see a negative
can be and usually are reported to the 3 major crediteffect on your FICO score even though you paid a
reporting agencies (Equifax, Experian and Transunion)card off!
and have a negative effect on your FICO score.Length of Your Credit History
As of April 2009, 15% of Americans or about 34 millionAnother 15% or so of your credit score is determined
people had made late payments in the previous 12by the length of your credit history. People with high
month period. A full 8% or 15 million people had missedcredit scores tend to have 3 or more credit cards with
a payment entirely. With the economy in its currentlow balances that have been maintained over a period
state and unemployment on the rise it is not likelyof 7 years or more. Constantly doing balances from
these statistics will improve anytime soon. So if youone card to another is a red flag to credit card
find yourself in this situation, you can take a littlecompanies. If you leave accounts open with a little
comfort in knowing you are not alone.activity that is paid off each month, you demonstrate
So, always do your best to make your payment onto credit card companies that you know how to
time. You should leave yourself a pad of severalproperly use credit.
business days to insure your payment has time toCredit Inquiries
clear before the due date. Many lenders have a zeroIf you are looking to acquire an additional credit card,
tolerance policy and being late by even one day canbe selective and don't apply all over the place. Many
result in substantial interest rate increases and lateapplications result in multiple inquiries on your credit
fees.record. Each one of the inquiries can potentially ding
Always try to make more than the minimum payment.your FICO score a few points. Credit inquiries and new
By paying the minimum only, you are greatly extendingdebt comprise about 10% of your FICO score.
your repayment period and the amount that you will beThis is less of a concern if you are shopping for a
paying in finance charges. Current credit standardsmortgage or auto loan. All mortgage inquiries occurring
require minimum payments equal to 1% of thewithin 30 days of each other are grouped together as
outstanding balance plus interest charges. Assuming aif they were one inquiry. For auto loans, the same
20% interest rate that means the debt will double in 5occurs but the limit is 14 days.
years. Making the minimum payment only will requireCredit Card Tips
over 8 years to pay off and you will have paid 160%* New credit card rules recently took effect this year.
of the original amount in interest!You should become familiar with these changes and
Also, making minimum payments raises a red flag withyour new rights and privileges to maximize your FICO
the credit card company. It signals that you may be inscore.
credit trouble which puts you at greater risk of being* Having too many credit card accounts, even with
unable to repay your debt. As a result, the credit cardzero balances, can also lower your FICO score.
companies may raise your interest rates.* Credit card debt is revolving debt as opposed to a
If you are having trouble making your payments,car loan which is installment debt. Revolving debt is
contact the credit card company immediately. It maylooked upon less favorably than installment debt.
be a little humbling but you will usually find they are* Your credit rating affects more than just your ability
willing to work with you in developing a repayment planto get a loan. Potential employers, landlords, cell phone
you can afford. It is usually in their best interest to keepcompanies and more may check your credit record as
you as a customer whenever they can. Ignoring thema judge of your financial stability and even character.
will only cause matters to worsen. When my wife was* You should check your credit report frequently. You
laid off, I contacted VISA and they cut my monthlycan obtain your credit report free from the 3 major
payment in half and lowered my interest rate fromcredit reporting agencies once per year. If you see
18.9% to 7.9%.errors or signs of identity theft, contest them and have
Carefully Manage Your Balancesthem corrected quickly.
The second most important factor in determining your* Open you credit card statements immediately and
FICO score is the total amount of outstanding debtcheck them for unauthorized use or billing errors.
you have. Even If you make more than minimumReport any questionable charges in writing to your
payments in a timely manner, carrying large amountscredit card company to preserve your rights.
of credit card debt makes you less likely to repay and* Report any lost or stolen credit cards to the issuer
can result in a ding to your FICO score. Make a pointimmediately! Do not wait! Most companies have 24
of not acquiring any new debt and paying down whathour phone service for reporting stolen cards. You can
you do owe.find the number on your statement or the company
Also, make sure you do not owe more than 50% ofwebsite. If you report the loss before the card is used,
your credit limit to any one card and not more thanyou are not liable for any charges. If it is used before
33% of your limit on all cards combined. Historically, thisyou report it, your liability is limited to the first $50 per
has accounted for around 30% of your FICO scorecard.