December 16,2008
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Ever-changing CC Approval Climate, Pt. 2
– How things change.Looking at this today, it may helpful to be familiar with what matters most for a given person's credit card situation. Since we know from the previous article that the credit card industry is raising the FICO standard on who they smile at (and offer the sweet deals to). It has raised from about 700 to 735. Today, starting at 700 is considered to be minimum to even open a credit card account. Again, there are several factors that go into determining this score and each has it's own importance (‘weight') by which they affect the final score. (For more details on what these various categories are and what they mean, please refer to the article series' entitled "Your Credit Rating(101)" and "Boost Your Credit Rating(201)").
‘Elasticity' measures the effect of how drastically one change effects something. So, let's say a credit card holder has good qualities in every area but one: 60% debt load. On a $10,000-limit account, the borrower owes $6,000. That person's score may ride just below acceptable because of this (say... at 689). But, by paying down $2,000 on that account, the debt load is reduced to only 40%. Two things happen here: 1) That person is now below the 50% danger level that was holding him/her in the ‘unacceptable' zone. 2) That person is now approaching the desirable 33% debt load that credit card lenders like. That score could rise to a FICO of 735 when the next FICO update takes place. Now that person is in the very good zone and eligible for the sweet deals.
Of course, there are other ways of changing credit card debt load. We can make the pie larger. That is, we can raise the line limit say...%5,000. Up to a $15,000 limit. Before the change, they still owe $6,000 and have a FICO of 689 as in the previous example. Remember we talked about ‘elasticity'? Now that person is down to the same 40% debt load as in the previous example. Will it have the same effect? No. The new score will now only move up to about 710. Within acceptable range for a minimal account, but no sweet deals. A FICO 735 would be required for that. Remember, these weights are ever changing and lower limits are the direction the industry is going. So, raising your limit may not be as helpful as simply paying down your debt. Also, consider that there are almost always other factors which will have sway. Debt load is a big one right now but doesn't even hold a candle to the damage done by missing a payment. Don't do it! If you default twice, you might as well forgetaboutit. Always make at least a minimum payment immediately. One dollar over is better.