December 08, 2009
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'POP!' Goes the CC Score Myth, Pt.1
The mything link.This series was introduced by the news article entitled "'POP!' Goes the CC Score Myth". To review the setting and environment which have so sharply altered credit card score behavior, you are are encouraged to read that preliminary. Following the rules from two years ago (or older) has been shown time and time again as of recent, to hurt loyal and well-behaved credit card holders on every turn over the last year. What was always known to be the rule has now been relegated to the level of "myth" until all the dust settles on the credit card supply and demand instability.
Several of these "former truths" are explained now:
Myth 1 -- Always Paying On Time guarantees a good FICO score: Not quite. The vice-versa fallacy comes into play here. The converse; "Always paying late guarantees a bad FICO score" is true, however. Unfortunately "good" doesn't rub off so easily. It's true that Payment History carries the most individual weight (35% of your FICO score). But remember, there are still four other categories which, cumulatively, command the remaining 65% of your FICO score weight. Like Paul Simon might say "There must be 50 ways to ruin your credit card score". The other four categories effecting FICO score-weights are:
> Amounts owed: 30%
> Length of credit history: 15%
> New credit: 10%
> Types of credit used: 10%Look for a future (or past) series explaining the intended meanings for this new 'FICO 08' credit card standard (released in 2009 and still not yet fully implemented).
Myth 2: Carrying a credit card balance raises your FICO score: Not so. Truth be known, the foremost usefulness of the FICO score is to allay risk you may fall delinquent in your obligation. Think about it -- wouldn't you feel safer knowing you will always be paid in full and on time. The fact that most credit card lenders encourage on-going debt to collect interest has not to do with your FICO score. Even that old practice is currently under review by the major credit card lenders.
Activity, yes. You need activity on your credit card to build your FICO score. Be careful to keep your debt balance low; not to exceed 30% Utilization Ratio. (U/R: = Debt / Limit). "No activity", will get your account closed without notice. Keep using your card.