Do you need a credit diet?
Diet season is upon us. With spring right around the corner and bikini season not far behind it’s time to renew those New Year’s resolutions. Get your booty in shape for summer! For many of us, it’s also time to think about a credit diet too. How about you? Are you starting to feel your budget getting tight with rising credit card bills? If so, it’s time to tighten your belt and shed some of those nagging bills. I recently asked questions to Can Arkali, principal scientist for analytics and scores development at FICO®. Here are a few good reasons to trim your credit card balances. Especially if you have any significant financial goals – like buying a home or paying for college – this year.
How low do credit card balances need to be to increase my FICO® Score?
Your credit utilization ratio – the percentage of your available credit you’re using – is an important factor in your FICO® Score. There are no hard and fast rules for ideal credit utilization ratios. Our analysis has shown that consumers with FICO® Scores of 800 or above use on average 7% of their available credit.
Is it better for my credit diet to keep a small balance on your credit card or should you pay it to zero?
Common credit scoring myth #1. Leaving some balance on your credit card each month is beneficial to your score. In reality, the credit card balances reflected in your credit report are typically the most recent monthly statement balance. Therefore they do not reflect how much of that statement balance you paid off. There is no truth to that myth. Failing to pay off your card balances in full every month will not benefit your score.
How often do I need to use my credit card to increase my FICO® Score?
After analyzing millions of credit files. We found that consumers with a modest degree of activity on credit cards represent slightly lower risk than those consumers with no recent card activity at all. So, demonstrating some activity on your credit cards, while keeping your balances on those cards relatively low, can help you reach and maintain a great FICO® Score.
For my credit diet, Should I spread out balances on all of my credit cards or does it not matter for your FICO® Score?
(for example, if I have $10,000 worth of credit card debt, is it better to spread it out to put $2,000 on 5 cards or $5,000 on 2 cards or $10,000 on 1 card?) Reducing your credit card debt is key here as opposed to restructuring it. Spreading out your credit card debt across multiple cards would not reduce the amount you owe. The first step would be to pay down or pay off this credit card debt. More generally speaking, making payments on all credit obligations on time, lowering overall debt as much as possible and applying for new credit only as needed are essential for a good FICO® Score.
Does your FICO® Score use your credit card limit as the factor or the highest the balance ever went to?
In determining the credit utilization ratio, the FICO® Score uses your credit card limit as reported by the lender and as captured on your credit bureau file. So keep that in mind while on your credit diet!
Is your home equity credit line “revolving” balance calculated in your FICO® Score?
Does the size of the loan matter? The credit utilization ratio calculation does not contain your home equity line of credit. However, the payment history on HELOCs is definitely considered in your FICO® Score.
Does a card that goes over the limit get more points taken away?
The FICO® Score is differentiated between someone who is at their credit limit (e.g. 100% utilized) on their credit cards, and someone who exceeds their credit limit (e.g. > 100% utilized). Our research has found that consumers with credit utilization ratios in excess of 100% represent a greater risk of default than consumers at or below 100% utilization.
So, was that inspiring or what?! Are you ready for a credit diet?! Give us a call! Now’s the time to trim your credit card balances and see your FICO® Score go up…just in time for summer vacation season!
~To Your #HealthyCredit!