February 10,2009
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Fighting Credit Card Changes, Pt.3
-- New FICO rules can hurt or help you.New rules-new pitfalls: Unknown to most credit card holders are new FICO standards which are just being implemented as we speak. These new standards are designed to be more fair and, as such, have changed the emphasis on what's good and healthy. There are many sweeping changes but, one of the unexpected concerns closing old and unused credit card accounts. The effect is two-pronged: ‘Utilization Ratio' and ‘Credit Card History'. With the recent trend of lenders closing old and unused accounts left and right, as they're doing now, this becomes an important concern with these new FICO criteria.
A credit card holder's ‘Utilization Ratio' is the amount borrowed against the total amount available from all cards combined. The current preference is 30%, meaning you are favored if you owe 30% of the total credit allowed to you. Less is okay but more is not. When your old accounts get closed on you for non-use, that much of credit availability is taken away from you. Same goes for having your credit limit lowered. So, if you hold three credit cards, each with $1,000 limits, only ever use one of them and owe $800, you're fine. ‘Utilization Ratio' is at 27% (800 / 3,000 = 0.27). If the other two accounts are suddenly closed for non-use, now you're in trouble. ‘Utilization Ratio' has suddenly jumped to 80%. Exercise each of your cards at least once every 5 months with a small purchase. Little auto-payments are nice ($4.95 every month for something you're already paying maintains an active account with little maintenance).
Secondly, 'Credit card history' has become much more important. If you have little history, you present a greater risk. Take that 10-year old card out of the sock drawer and use it every few months so the lender doesn't close the account on you. A ten-year account in good standing goes a long way, using the new criteria. The new FICO rules are much more fair but, different. It's well worth the while to be aware of them. Please refer to the article series entitled: "Rules of FICO'08 in 2009" for an easy-to-understand run-down.