The Numbers Game Behind Your Credit Score

In today’s economy and mortgage scandals, your credit score, or FICO, is becoming more and more important.  When applying for a loan, having good credit will be the deciding factor on whether or not you will receive that money.

Creditors are more hesitant to give loans out as readily as they were a few years ago.  It then becomes even more significant to have an excellent credit score in order to stand out among other applicants.

First, let me briefly explain what FICO stands for.  The Fair Isaac and Company is a scoring system that rates people on a scale of 300 to 850; the higher number the better.

The credit scores are based on three credit bureaus: Equifax, Experian, and TransUnion. The scores are very close to each other, so you can pay a few bucks and get a compilation report at myfico.com or get a free estimate at creditkarma.com.  If you want to get a realistic picture of what the lenders see, annualcreditreport.com entitles you to one free report from each agency every 12 months.

With all the myths and misconceptions out there on FICO scores, it is a good idea to put some of those notions out of your mind.

The biggest contributor to lowering your score is having a late payment. Before you stress about the fact that last month your credit card payment four days late, this generally means late by 30 days or more. But, don’t push it around day 28.

A late payment can reduce your score by 100 points. Even if you have to pay the minimum, it is best to make a payment on time!

Utilization Rate

The next biggest factor is your balances versus your available credit. This is referred to as utilization - your total balances versus your total available credit. For example, if you have $20,000 available credit and you have a balance of $19, 650, that is not good. Clearly.

Where this gets tricky is with credit cards. If you have several credit cards, it is better to keep them open even if you do not use them. If you close all your credit cards accounts, you will lower your debt to credit ratio, which can lower your credit score.

The longer you have been in debt, the longer your credit history. You may have paid cash your whole life and never been in one ounce of debt. However, in a lender’s eyes – prove it.

If you have an old credit card that you have been using for 10 years and have habitually paid it off (or at least made a payment) each month, your credit score will benefit from this consistency.

While you will have to occasionally close credit card accounts, don't make a habit of opening and closing accounts in a short period of time. Show off the fact that you can consistently pay off monthly credit cards and your score will reflect that.

While people try and play the numbers game to maintain an excellent FICO score, it makes it helpful to have an understanding of your score and your debt.  Having balances on multiple credit cards may help your score. However, if you can not keep track of one and make a late payment, all of that is out the window.

Overall, it is best to manage your debt wisely instead of trying to play the numbers game.  Pay off your loans, especially the high interest credit cards.  Keep your debt low.  This is what will help you get up in the seven or eight hundreds and land you that loan.