Credit scores: Playing the game

jkom51February 1, 2012

On the recent "My debt problems" thread, one of the responders posted that she didn't understand why her household's credit score was lower than expected. I clip a lot of financial articles on a regular basis, and thought this info might assist not just her, but others as well.

I've included the link to the full article also.

Article (excerpted):

Raise your credit score to 740

As lenders continue to tighten credit requirements, getting a good interest rate -- or a loan at all -- requires that you understand how the scoring system works.

By Liz Pulliam Weston, MSN Money, June 23, 2010

In our post-crisis economy, good credit isn't just nice to have -- it's essential if you want to level the playing field with lenders.

Give your limits a wide berth

Pay down and spread out your debt. More than a third of your FICO score depends on how much of your available credit you're using -- your so-called credit utilization. The FICO formula likes to see big gaps between your balances (whether you pay them off each month or not) and your limits, especially on credit cards. (You're rewarded for paying down installment debt, such as mortgages and auto loans, but your scores improve much more dramatically when you pay down revolving debt such as credit cards.) In short, it's better to have small balances on several cards than a big balance on one card.

A balance is a balance. You have to worry about your credit utilization ratio even if you pay your balances in full each month. The balance that's reported to the credit bureaus is typically the one on your last statement, not the balance that's left over after you pay your bill. So if you charge $9,000 on a $10,000 card, it's going to look like you're using 90% of your limit (which is really, really bad), even though you paid off the balance in full when you got the bill.

Shoot for 10%. The less of your available credit you use, the more FICO rewards you. Keeping your credit utilization below 30% on your cards is good; getting it below 10% is even better. If you regularly use more, ask for a higher limit, spread your charges out on more than one card or make two payments every month -- one just before your monthly statement closing date to lower the balance reported to the credit bureaus and a second one just before the due date to avoid late fees.

But don't let your cards gather dust. Overloading your cards is a bad thing for your scores, but so is not using them at all. The scoring formula prefers to see accounts that are being actively used rather than sitting on a shelf. Even a little activity is better than no activity."

Here is a link that might be useful: Full article on MSN Money: Raising your credit score

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Jkom, the link doesn't work, but I read something similar. I know I am explaining my question wrong and I apologize.

We only use one card. We have had many cards over the years and they still show on the credit reports even though they haven't been used for years. We have never run a balance on any card. We have always had high credit score. As a result, we have a high a high amount of credit available. For example, our Visa has a $25,000 credit limit. We have 4 other cards with similar credit available. We've never used nor asked for that amount.

Since my husband retired, our income has dropped but those cards still appear although they have zero balances. There are no negative reports, nor have there ever been.

They (credit bureau) states our credit/debt ratio is too high. The only way for me to correct that is to formally close all our old cards. I was afraid that would negatively affect our credit report. But that's the only way to lower the credit/debt ratio.

Thanks for the information.


    Bookmark   February 5, 2012 at 7:06PM
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Sorry for the bad link - it seems that MSN Money has deleted that page entirely! I do have the full article but it's pretty long - 5 pages - so people can email me off-line if you'd like me to send it to you directly.

    Bookmark   February 7, 2012 at 7:24PM
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Knowledge is power.

They don't teach much about money management in school.

Many didn't learn much about it at home - as children grow, it seems to me wise to have them gain in-depth knowledge, incrementally, of how the family's financial system works.

When I was a kid, we got a weekly allowance, that grew as we grew, and we were epected to buy our clothes for school and cover school expenses (which were smaller than currently).

World War II began in 1939 when I was 10, the farmhands went off to war and what Dad and this 10 year old, plus a couple smaller, got done - got done: the rest ... didn't. We had lots of work in summer and Dad paid us for that, which helped us buy the things that we needed to return to school and there was an increase in our allowance, to compensate for the increased chores, year-round.

We were encouraged to save some - I had a bank account when I was too young to see over the counter ... and we were expected to pay at Sunday School, church-based youth group, etc. from our allowance.

In case of dire emergency, we could borrow against future allowance from Dad, which entailed some questions as to whether we might have foreseen the problem, and, even if not been able to have seen it coming, to cover the cost from savings, had we chosen to have some/(any?). And we learned early the discipline of getting along for a while on less after we'd borrowed, for Dad expected us to repay those loans earlier rather than later.

Good training as to management of debt ... which would be helpful much later, when "credit" cards appeared on the scene: we knew that they didn't offer "free money". When we use someone else's money - usually they require some compensation (and, sometimes ... way too much: have you investigated the economics of the recently-arrived "payday loan" game?)! After one has stepped into a bear trap - it's a bit late to wish that one had chosen where to put one's feet more carefully!

Looks as though Microsoft has cut some of our opportunity for learning about one portion of personal financial management a bit short, also.

ole joyful

P.S. When one guy, regardless of how central a position he holds in our economy, can become the richest man in the world in half of a generation ...

... do you figure that possibly sometimes people get overcompensated for some innovative discovery that they have made (usually, along with a number of others)?

That just possibly our free-market-based economy could stand some tweaking?

And the Bolsheviks and the Commuist systems aren't any better - look at all of the newly-minted millionaires ... nay, billionaires ... that have been appearing in Russia and China as their system matures (goes to seed?).

And during their heyday, they arranged things so that not too many became part of the core system - didn't want to spread the largesse around too much - or it'd get too thin for each!

o j

    Bookmark   February 10, 2012 at 5:17PM
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