Monday, October 13, 2008

During the Credit Crunch, Work That FICO Score


This is the perfect time to work on your game plan (link here). It's also the perfect time to fine-tune your credit score. Even though the credit markets aren't hopping right now, that doesn't mean you should sit idle. Take advantage of this down time to position yourself for the credit rebound that will eventually take place. It's a great time to get back to the basics. And it's a great time to pretty yourself up.

In order to get in tip-top shape, you must know how the FICO score is comprised.


PAYMENT HISTORY

The most important category is, not surprisingly, payment history. At 35%, it's a no-brainer that you better pay your bills on time. Not only does it help your score tremendously, it also helps you avoid the consequences of defaulting on your credit card agreement. A single missed payment can result in a sky-high interest rate. Pay your bills on time. It has never been more important to pay your bills on time. This is not the time to miss a payment. That's why I use a spread sheet (link here) to track my payments.


UTILIZATION

Next up is amounts owed (also known as utilization). If your utilization is high, get it DOWN. Work on paying your debt down without accruing new debt. Utilization accounts for 30% of your score. This is the single-easiest place to pick up credit-score points (link here). I consider this low-hanging fruit. If you want to get your score up, simply pay down your balances. People with good payment histories will see their biggest jumps when they pay down large balances. If your utilization is already low, keep it low. Do not -- during this credit climate -- start increasing your utilization. It's a recipe for adverse action. Enough said.


LENGTH OF CREDIT HISTORY

Length of credit history, meanwhile, accounts for 15% of your score. If you must open new accounts in this credit climate, be judicious. Open them sparingly. Length of credit history looks at your oldest account and it looks at the average age of your entire credit history. When you open new accounts, the average age of your history gets reduced. Indeed, my recent Equifax FICO score of 777 (link here) would have been higher if not for my relatively low average age. Although my oldest account is more than 19 years old (that's good for my score), my average age is just four years old (that's not good). New accounts during the past two years, have brought my score down. I can help myself by refraining from new applications. Given this credit climate, it doesn't make sense to run out and grab a bunch of new accounts. Work on this aspect of your score by sitting tight.


NEW CREDIT

Speaking of new accounts, new credit is worth 10% of your FICO score. FICO looks at recent inquiries, time since most recent inquiry, number of recent accounts, proportion of recent accounts by type, and time since recent account opening by type of account. New accounts generate credit inquiries. Credit inquiries result in a lower score. Inquiries impact your score for twelve months -- even though the inquiry remains on your credit report for two years. If you're not applying for new cards right now, you'll help yourself out in this particular category.


ACCOUNT MIX

Finally, the rest of your score (accounting for 10%) is comprised of account mix. A borrower with experience in a mix of credit types (installment, revolving, mortgage, retail credit cards, etc.) will likely do better in this category. That said, I wouldn't run out and grab an installment loan just for the sake of having a better mix. Most of us, over time, will grab these kinds of accounts. I'd let time take its course here. Plus, even if you did run out and apply for something, in an effort to get a better mix, FICO would ding your score for the new account. It's not worth the short-term hit to your score. In other words, let's not worry about getting too fine with this particular category. Eventually, most of us will have a nice mix of credit. Be patient.

Now that you know how FICO works, you can work on improving your score. To recap, most people will get the biggest bang for their buck by paying down balances. And it goes without saying that you should be paying your bills on time. Additionally, ease off the new accounts. New accounts generate new inquiries, which ding your score.

Have a plan (link here). My goal right now is to get my scores above 780. All three of my scores are currently between 765 and 780. By the way, I did not pull that 780 score out of a hat, either. I found a breakdown of FICO scores on Equifax's Web site a few weeks ago. By being at 780 or higher, I will be in the top 20% of all FICO scorers (link here). That's where I want to be. From Equifax.com:


During the credit crunch, I am doing all I can to look as pretty as possible. I'm keeping utilization down. I am not reducing my average age by running out and grabbing a bunch of new accounts. As a result, I am also not adding any new inquiries. And I am paying my bills on time (and in full).

This stuff is basic. I haven't written anything here that is provocative or Earth-shattering. Still, during this uncertain credit climate, you would do well to work your FICO score.

Your FICO score is one thing in this crazy credit climate that you truly do control.

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43 comments:

Bob Wang said...

Does this mean I have to be good?

Josh said...

Now how long for the rebound? :-)

Can't be too long or the country can't operate....

Scott in VA said...

Funny thing about this so called crisis is I gained 10 new accounts. But for the most part it was highly selective with lenders I wanted for the long haul.

I am done now and my scores are better than when I started simply due to my file being thin from the outset. But not as good as it could be due to the Blitzkrieg addition of new accounts.

The dust will settle next year which should see me in the 750's opposed to the 700-730 I am sitting at now. Best part is knowing you are in a good place and can let time take over.

Looking forward to 2012 when late payments from an old account I paid and closed falls off. Should get me into that FICO high achiever area.

GlobCredit.com said...

Josh, who knows. Could be a day, could be a year. But this column should serve as a reminder to get that FICO score up. This is not the time to have a weak FICO score.

Craig from Australia said...

Does high utilization bringing down your scores mainly relate to credit cards and revolving credit lines, or all of my outstanding debt?

We have an investment property with an interest only repayment so the debt obviously remains unchanged at 100% of what we borrowed, and we have a recent auto loan where the balance is basically at what we borrowed. Will this mean are utilization is therefore near 100% and we should lower these 2 balances?

Thanks Craig

GlobCredit.com said...

The greatest impact is in revolving debt, Craig. But installment loans (albeit for a much smaller impact) still count as well. When I talk utilization, though, it's pretty safe to just think revolving debt.

But, yes, utilization counts everything. It's just that FICO gives greater weight to revolving debt.

I have never seen a FICO article that spelled out a specific weight, though. I have no idea if revolving debt is worth 95% of the utilization component of FICO. My experience tells me that it's closer to 100% than 50%, though.

My auto loan balances have never heard my score -- except that it reduced the average age of my credit history). I wasn't paying much attention to my FICO score when I got my last mortgage, but I imagine that it doesn't hurt FICO much either -- in terms of utilization.

I'd be concentrating on your revolving lines of credit, Craig.

Far Left Texas said...

Is the era of "Easy Credit" over, or is the era of "Stupid Lending" over?

Adrian Clark couldn't buy a new car with zero down, he needed to come up with $1,000. Steamfitters have a median income of $20 per hour - the down payment needed was just over a week's worth of Adrian's salary.

Don't forget, supply and demand will come into play. If not enough people apply for credit, it will become cheaper and easier to get for those who are qualified.

The days of getting a car for zero down and a 650 FICO might be gone, but people with a 750 FICO and 10% down will have no problems whatsoever - if your income will support your payment.

When they define "easy credit" as "Hey, since you are breathing, we will finance this car/house/stereo/boat for you" then yes, the days of easy credit are over.

If we define "Easy Credit" as "Your credit score is good and you have the means to repay", then I think credit will remain available and easy.

Far Left Texas said...

Whoops - double posted. Marcus, can you delete the post above and this one?

GlobCredit.com said...

Actually, I see that you double posted. But if you don't mind, I am going to leave this one here too. It's a thoughtful post; not everyone will see the other one.

Plus, I can use your post to reinforce what I have been saying: WORK THAT FICO SCORE. People will good FICO scores will be in a much better position going forward.

Craig from Australia said...

I thought it was mainly revolving debt, but thanks CM for confirming this and I will be disciplined with my revolving lines. Thanks for your quick response!

Craig

GlobCredit.com said...

Craig, you are welcome for the quick response.

Best to you.

Thanks for reading, mate.

savemanatees said...

I made a huge mistake by finally believing TU's comments on how I could raise my score. Every time I pulled the reason my score wasn't higher was due to "lack of non-mortgage installment loan."

After shaking my head for about a year I decided to open a CU account. In order to kill two birds with one stone I decided to borrow a small amount of $$s (2.2K) by collateralizing it with a savings account. The interest on the CU loan was 2.75% but my HSBC savings was paying 3.5%. So I immediately deposited the loan proceeds in my HSBC account. Now instead of paying interest I'm making a small amount....very small but better than -0- or negative.

In that same month before opening up the CU account I was visiting my least favorite medical professional....my dentist. I needed two caps on my back molars. Not until after the impressions were taken and my mouth numbed did the office mgr come in and give me a 'heads up' on the cost. I had just purchased a home in GA for cash...so I was cash tight. I squeaked...she asked me if I would like to apply for their credit...12 mos 0% interest. I nodded my head up and down. Fortunately for my dentist I had lousy molars and good credit as GEMB approved $3K on a CareCredit card.

These two transactions have, in the 6 month short term dinged my scores about 20 points. Transunion reason...too many new accounts. Equifax too many new accounts AND the installment loan. Oh yeah...the CU pulled my report twice and the one pull for GEMB...so more hits.

Tomorrow I'm going to pay off installment loan. That should give me a kick post Nov 1st. My CareCredit is going to keep getting paid down at the 0% rate (equal monthly pmts) and my other CC debt to zero.

So pay attention to your scores but the lesson I have lerned is that the CRAs 'advice' on how to raise your score is BS. Follow CM's simple plan....I should have followed my own gut instinct about the installment loan.

The good is I have savings and now I have established a good relationship with my CU. So the future will be good...the initial hits hurt though!

GlobCredit.com said...

Manatees, nice post. Reinforces everything I know.

Regarding your installment loan being paid off, don't expect a score bump. I usually get ZERO points for paying my installment loans off. Pay a car off? No score bump. Pay a student loan off? No bump.

Because of that, I don't much worry about accelerating my payments with these kinds of loans (only talking about FICO here). Also, because I never get any score benefit from paying these installment loans off, I have guessed that utilization for installment loans is only a minuscule when it comes to FICO. Revolving debt is where utilization really factors in.

So, good news on paying your installment loan off (no more interest to pay).

But don't expect FICO to clap too loudly.

Drew said...

As much as I appreciate this blog and it's advice, I find it over simplistic, especially in the current economic situation to say, "If you want to get your score up, simply pay down your balances." For many, including myself, it's no longer a simple matter. I've been struggling for nearly two years now after the halving of my income. I've had multiple late payments and only recently have regained some stability. I snowball.... but getting to below 30% is far from "simple"

GlobCredit.com said...

Drew, I think I said that in order to get your scores up, the simplest way is to get your balances down. That's true. That you and others are struggling does not negate my comment. It's true today and it's true tomorrow. Get your balances down.

I don't believe that I ever said it was SIMPLE to do it. I just said that getting scores up simply requires getting balances down.

As I can see from your comment, it's not an easy thing. No simple task for everyone.

I think you're reading too much into my sentence, Drew. And I apologize if I made it seem as though it's a simple task.

My point was -- and is -- that scores go up when balances go down.

This was a basic column. As I said at the end: "I haven't written anything here that is provocative or Earth-shattering."

savemanatees said...

I'm applying for a HELOC tomorrow. So for that reason I will pay off the secured installment...but thanks for the info. I have my CareCredit under 30%...I hate to lose the 0% interest free money by PIF before the end of the promo in May. Would you PIF early?

After the HELOC is approved I don't NEED anymore credit. I don't even care if I get CLDs. So far only Target Visa has hit me at a 50% CLD from $5K to $2.5K. I have never ever used the card.

To Drew,

You're absolutely right that the vast majority of Americans can not accomplish CM's plans overnite. But the factors he is using should be taken into account when you're planning a budget and trying to meet some financial goals.

We must all tighten belts....and do not take job security or stability for granted. It is more important, IMO, to have some cash reserves than to accelerate mnthly CC pmts. If one is in debt......acquiring access to more debt is not the drug of choice.

GlobCredit.com said...

Manatees, I can't advise you on whether you should pay the carecredit balance off. That's an individual decision.

I was surprised by Drew's comment. It was not my intention to paint this process as easy. It's not. The goal should be to get balances down. But I understand that it cannot be done overnight.

It's just a goal to shoot for.

Anonymous said...

Look at that first graph! I find it hard to believe that 40% of the population of the US has a FICO score higher than 750...

GlobCredit.com said...

That's what Fair Isaac says it is. I got that chart at myfico.com.

I have no reason to disbelieve it. HOWEVER, I bet that it's not as high today. That I will grant you.

clutchcargo said...

I took CM's "simple" remark to mean it's the area consumers have the most control of (that also has a big impact).

GlobCredit.com said...

Not to mention that I actually used the word "simply," not "simple."

I appreciate Drew's comment, though. If he was thinking it, maybe others were thinking it, too. If they were, hopefully these comments will dispel that notion of me thinking this stuff is easy or simple.

savemanatees said...

You mean the two one dollar bills I have snuggled together in my Vicky Secret's undie drawer are not going to procreate?

I'm guessing you think I should pay down the CareCredit bal if I'm looking for a full kick. My scores are 720-760...with Ex being the lowest always. So I really am like a golfer with my FICO scores. Always competing with myself and the day before's scorecard.

GlobCredit.com said...

Does Carecredit report as an installment loan, Manantees? If it does, you will not get a score bump.

I am totally averse to carrying any balances right now. But that's me. Everyone has to gauge their own tolerance for carrying balances.

savemanatees said...

No it is open ended....so it is revolving. I've saved over $111.00 in finance charges. I love the use of free money. So with pretty healthy scores I will go get my GA HELOC tomorrow. Can't beat the rates right now. After that my CC utilization will be almost nil.

GlobCredit.com said...

Nice, manatees.

Good luck!

Leigh Angela said...

My boyfriend is 28 and has a car loan and a school loan, but that's it. No credit cards, just checking and savings. Is it safe for him to apply for his first credit card right now? Or should we wait until the banks are "saved?"

I should also note that he applied about 2 months ago and was denied, I think because of not enough income. One thing he did wrong was he chose an application for "good credit" as opposed to "little or no credit."

If it's not a good time for him to apply, what can we do to get him credit? He's self employed so his only proof of income is pretty much his bank account balances.

GlobCredit.com said...

Leigh, I am not in the advice business. At least I try not to be. But I do have an idea.

Visit creditboards.com/forums

There, you can post your question to a lot of readers. I imagine they'll be happy to answer this kind of question.

Not trying to blow you off, just don't want to give you fault information that you might rely on. Better for you to have the collective wisdom of thousands over at creditboards.

I hope you'll continue to read my blog, though.

Good luck.

TheCreditStudent said...

I fall into the "has very high utilization" category. *blushing* My husband and I had a goal to have our Credit cards and our signature loans (2) paid off by the year end. We had hoped to boost our credit scores in doing so. We have paid off the signature loans first and I admitedly am SCARED to pay down the Credit cards. My CC utilization is 60% (no lectures needed... I know BAD... VERY BAD!). My husband's is at 55%. Why am I scared? I am terrified if I pay them off, they will slash my limits to smitherines. I am hearing this happening from friends and family. Is it worth the risk to do it anyways? We dont need the credit and have the $$ to pay them off, but if they come back and slash my limits to really small limits, I know I will have little restraint when it comes to closing them. SIGH.......

love your blog BTW, tho it's a bit overwhelming for a newbie like me, lol

GlobCredit.com said...

CreditStudent, welcome.

If you are overwhelmed, don't worry about it. Start at the beginning. I started this blog in early July. I started off very slowly. The blog builds on itself. If you start back in July and make your way to here, you'll be just fine.

Now to your comments about balancing chasing -- or chasing the balance as some people call it. If a card company is going to do it, they're going to do it. I would argue that if you pay your balances slowly, in an effort to ward off the balance chasers, you'll suffer death from a 1000 paper cuts. My point? They'll likely chase your balance all the way down.

But if you pay your bills sooner, maybe they spare you. Or not. Who knows. But, this we do know: you'll save money from not having to pay interest any longer. All things being equal, I'd take my chances paying off the bills sooner rather than later. Plus, in the process, you will save some money because you won't be paying interest.

I don't lecture here, by the way. You're here now. That's all that counts. We're not going to worry about what happened in the past. We only care about what you're going to do from here.

Welcome aboard, CreditStudent.

Samantha said...

I check my Fico score each month with the free service that Washington Mutual (WAMU) offers for it's cardholders. Over this past year my Fico score has gone up about 100 points. I've been making sure I pay my bills on time and the last 6 months I have been working on paying off the high interest credit cards I have. However, when I checked my score yesterday for November I dropped 34 points from last month! Nothing has changed that I am aware of. I did get an Ikea credit card in September, used it to the limit ($300) then just paid it off this week. Also, I have an old Providian credit card that I have not made a payment on since May 2004. Nor have I spoken to any of the collection agencies who have called and/or sent letters. From what I've read the statute of limitiations will run out in May of 2009 and if I attempt to reconcile the matter now it will cause a serious ding to my Fico score. Do you have any clue why I would have dropped 34 points in one month? It was pretty disheartening to see that after working so hard to increase it.

Samantha said...

One more question, if you don't mind. I have a car payment that is due on the 15th and has a 10 day grace period. A couple of months I didn't make the payment until the 30th of the month. Does this affect my Fico score? I am under that impression that it's only reported if you go past 30 days late.

Thank you! Great blog, by the way!

GlobCredit.com said...

Samantha, your mention of the Ikea card is what I'm zeroing in on. The Bankcard Industry Option FICO score (the one you get from WAMU) is very sensitive to new accounts. It's not unheard of for some people to lose 30 points when a new account shows up on the credit report. Plus, I'm wondering if that Ikea card is coded as a finance company card. If it is, you likely took a small score hit for that as well.

I'll just make this general statement. Consumers would do well to avoid those finance company accounts. They're often lenders of last resort -- and the terms usually suck.

Samantha, keep paying your bills (on time) and your score will rebound.

GlobCredit.com said...

Samantha, when was the last time you pulled your credit report? If it's been a while, perhaps you should pull it.

From what you're saying, you would not be 30 days late. You'd be 15 days late. But, still, you might want to check your reports just to make sure. You can get a free credit report (with no strings attached) at annualcreditreport.com. You can get a free report (from all three bureaus) once a year.

Samantha said...

Thanks CM! I got the Ikea card to buy a bed for my son and it had 0% interest if paid in full within 90 days. After that the interest rate goes up to 16.99%. I've cut that one up now too now that I've paid it in full.

I have not pulled my credit report in about a year. I'll check to see if it's time for another free one. In the meantime, I'll just continue to pay off my credit cards and wait for my Fico to rebound.

Thanks again, CM! Your blog should be required reading for everyone!

GlobCredit.com said...

Samantha, good luck on getting that FICO score back up. Also, when you say that you've cut up the card, does that mean you're also closing the account as well?

As for required reading, I appreciate that. I rely on people like you to tell friends and family about the site. I do no advertising for this site. It's word of mouth. Only launched it in July.

Hope to see you again.

Samantha said...

CM - No, I'm not closing any of my accounts. I'm keeping them all open (even with zero balances) because from what I have read that too can lower my Fico, especially if I close out my older accounts. Is that true?

I'm telling all my friends about your blog. It's a big help to people trying to understand the credit maze.

GlobCredit.com said...

Samantha, rather than me go into a long post about how closed accounts impact FICO scores, let me just give you a link to a story that I wrote previously.

You'll see exactly how closed accounts impact FICO. I also explain the age component of FICO in that same story. Here you go: How Closed Credit Cards Impact Your FICO Score.

And read this one about not letting your accounts go inactive (because that can impact FICO too). Here is the story for that: Don't let Your Credit Card Accounts get Dusty.

Samantha said...

CM - thanks! I'll read those links now. And good luck with law school. I'm a paralegal for a mid-size law firm and I love it!

GlobCredit.com said...

Samantha, enjoy the reading. Just FYI, this site was built in a logical manner. My earliest stories give readers the building blocks they need to understand the stuff that I often highlight and write about today. The site builds on itself. That's why I always recommend that people start back in July. Gives you a great foundation. It's just like law school. We get the basics during the first year so that we can deal with the second and third years without a problem.

Glad to hear that you're enjoying your job at the firm.

Samantha said...

CM - one more question. I have a $2,000 credit line with Dell that I paid off about a year ago. Would you put that in the same classification as Ikea as being a "small finance company" so would it end up hurting more than helping my Fico score.

Also, I'm wondering after briefy (will fully read it tonight) if I should make a small purchase on that account. All of my other credit cards were cut up and thrown away so that I would resist the temptation to use them. I would have to contact the companies and request new cards, make small, periodic purchases and pay the bills on time.

GlobCredit.com said...

Samantha, it's all about who finances the account on behalf of Dell. My guess is that it is CIT (not Citi). I don't know with 100% assurance, but my guess is that it would be coded as a finance company as well.

I mostly recommend that people use their accounts periodically because companies are closing accounts due to inactivity. But the FICO thing comes into play as well. Inactive accounts (that are no longer being updated every month by the card company) will not count in the utilization portion of your score. If you have a ton of credit already, it won't make much difference if your accounts are dusty. But for people with just a little credit, those limits could be very important to overall utilization.

Samantha, this entire scoring system is difficult to game. Just when you think you know how to proceed, you get dinged for something else.

Example? Let's say that you have 6 cards that are totally inactive. You decide to make small purchases on all of them. You get a nice little bump because your credit limits are now being recognized by FICO again. Cool.

But now you also have a bunch of accounts reporting a balance at the same time. Guess what? FICO doesn't like a lot of cards reporting balances at the same time. So, that month you'll take a little hit for that. The score would rebound the next month after you paid them off, though.

Anyhow, that's why I recommend that people read all of my earliest stories.

Samantha said...

CM - Oy vey! I'll be pouring over your blog after work tonight. Thanks again!

GlobCredit.com said...

Samantha, welcome to the site.

Nice to have you here. I'm quite active on this blog. What's more, my readership is active here as well. Most comments and questions get replies.

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