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February 6,2009

  • Rules of FICO'08 in 2009, Pt.3

     – Utilization Ratio and History Length.


    ‘Utilization ratio' of 30% or less: The 30% ‘utilization ratio' limit moves up in importance. Until recently, using half of your credit limit was considered a good thing (50% utilization ratio). Now, not only has that ratio been reduced down to only 30% but, going above that ratio and charging more than 30% of your allowable limit will count more heavily against you. Even paying off your entire credit card debt every month is considered a good thing now (how are the lender supposed to make a living when they can never collect a finance charge?). It turns out that those who always pay in full every month will have the best credit card scores. Whatever you do, never max out your credit card.

    Closing unused accounts can  now hurt you: It comes back to the Utilization Ratio described above. Now, keeping old credit card accounts open works to your favor because of the added available credit they offer (even, and especially, if you never use it). Of course you may need to ‘exercise' these old cards occasionally with a small purchase just to keep them active. Credit card lenders are (as of recent) closing inactive accounts left and right to reduce their own ‘risk exposure'.

    Conversely, having too few credit cards can hurt you as the credit card industry is also reducing active credit limits left and right. If you operating at the preferred 30% utilization ratio level right now and one of your lenders reduces your credit limit, now you're in trouble because gone up beyond what they like.

    To boot, credit history length will still be important. So, if you have only two credit card accounts; one opened last month and the other ten years old (but never used), keep them both active. If you close the ten-year old one, now your length of history only goes back one month. The best thing to do is set up an automated charge every month on the old card for a ‘trickle amount' (say $4.95). That way you don't have to remember to use it every four months, it will automatically stay active and you get a reminder every month to pay it.

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