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I wanted to clarify "utilization" since someone asked.  Utilization means use or how much of your credit limit you are spending.  If you have a $500 card and you spend $100 your utilization is 20%.  If you spend $300 then you have utilized 60% of your available limit.

 Now if you are like every one else and try not to go over your credit limit by using SEVERAL of your cards you can't look at your utilization by just one card with a low balance, you have to look at ALL of your cards to see if its gonna affect your FICO Score.

 If you only have three credit cards, and you are consistently close to your total credit limit every month, here is a scenario below:

 Card 1:  250 limit    $240 spent

Card 2:  $500 limit   $400 spent

Card 3:  $300 limit  $200 spent

Total limit $1050 with 80% utilization.  Your cards are almost maxed out. 

How this could affect the FICO Score: 

a.  If these three cards are the only things on your credit report and your utilization was higher last reporting period your credit score would go up a bit. 

b.  If your utilization was lower last reporting period your score may drop. 

c.  If you had the same balances last reporting period, then it may stay the same. 

How your score goes up or down is based on new changes to your credit report.  If these three cards are the ONLY accounts on your credit report then new changes in utilization and payment history will affect your score.

 

Card 1:  $250 limit   $25 spent

Card 2:  $500 limit   $50 spent

Card 3:   $300 limit  $30 spent

Total limit $1050 with 10% utilization.  You are using your credit wisely.  Your score will improve if nothing else changes on your report.

 

Miss one payment and your score will drop significantly.  I always make sure this never happens by doing ONE thing every month.  When I get a new credit card I ALWAYS ask these questions:

1.  What is my interest rate?

2.  What is my payment due date?

3.  When date does my statement close?

4.  When am I eligible for a credit line increase?

 

When my statement comes in I ALWAYS pay the minimum payment due FIRST if my card has a current high balance.  This ALWAYS makes sure that my card is paid On Time EVERY time. 

I will then calculate how much I have to pay down this card to get my utilization to 5 - 10% of my available credit limit BEFORE my statement closes. 

So if my credit limit is $500, I pay the minimum payment and then send one more payment later in the month but before the closing date for that amount to leave a balance of $50 or less.

My credit cards, and bills, are paid/never late.  I even have a charge off vehicle that I voluntarily surrendered that says Charge off -Paid/never late.  I only owed $4000 on that stupid car.  How sick is that?  I'll settle that one next tax refund.

Now, back to my credit.  Since I usually keep my account paid/never late and at a low debt -to-credit ratio using the method above.  When the information in my credit report changes to show that the NEW information has better payment history and no debt other than my credit card balances, my credit score will go up significantly.

Of course, it won't get much higher after that.  If I purchase a new vehicle, or home, that will raise my debt and my credit score will drop the reporting period immediately after the purchase.  Then it will steadily rise again on a month by month basis as I keep up with the payments. 

My FICO score is ALWAYS based on what is REPORTED on my credit report that month.  Its mainly about those NEW changes in behavior.

 

The Big Difference: Paying a collection account vs. Removing a collection account

There is a really big difference here and I'll try to put it in really, really simple terms so I dont confuse myself.  LOL

 

I have a bunch of collection accounts.  Once the collection account is there, well, it's just there.  Already done it's damage and shortened my length of credit history.   It's been there for a good two years now.  I don't have many old accounts on my credit report.

 So, I settle/pay it off.  It shows a $0 balance but is still on my report.  So I dispute it and try to have it removed.   The credit bureau removes it.   My score drops.  Why? 

Paying off the debt helped my score because it lowered my debt.  Since it was an old account it helped the length of my credit history.  When I had it removed I shortened my length of credit history so that's why my score dropped. 

Add that to the old credit card accounts that were paid/never late from eight years ago that a real estate agent suggested I close because, and I quote "you have too many credit cards" and we are talking a MAJOR drop in Score. 

Those old accounts lengthened my credit history AND upped my total credit limit so I did not look maxed out.  So....don't remove accounts unless you have enough old, old accounts that are 8 to 10 years old that removing one newer collection account from 1 year ago won't matter.   Your score might dip a little the next reporting month but should recover by the next calculating month.  It won't take the goshawful nosedive mine did to 330 from 613.  ((((shudder)))))  I still haven't recovered from the shock.

Mood:  energetic

Current Fico scores:

590  Transunion

547  Experian

528  Equifax

 

Score the lenders will look at 547.  So, what's up with my credit score?  My credit report of course.

It took me three years to figure out how to read my credit report and understand how it affected my score.

 

1.  I have revolving credit.  Half of my revolving credit is open and paid on time with a 2% credit utilization.  My open revolving credit limit is $3000.  I pay my credit cards on time, I keep my balances under 10% credit utilization.  Credit Utilization is 30% of my score.

The other half of my revolving credit is "revolving credit card debt" which is in collections.  This amount is $4800.  So to a lender, my credit limit is $3000 and my balances are $4860 so to them I am maxed out and overlimit.

 

2.  My revolving credit card debt is in collections.  Even though I may be paying my open credit cards on time, the several collections accounts report every month that I have not paid this debt.  So every month it is listed as a "missed payment". 

 Payment history is the greatest part of my FICO score at 35%.   I have revolving credit card debt and installment debt in collections, so that is a lot of missed payments.

 

3.  When an original creditor (like my credit card company/lender) sells one of my accounts to a collections agency, it becomes a "new account" for the collections agency and then is reported to my credit report as a "new collections account".    Length of credit history is 15% of my score, so the older my accounts are the better.

4.  Some collections agencies will also pull my credit report to give me a "hard inquiry" along with the negative "new credit account", "shortened length of credit history", and "new missed payment".  So that is four whacks at my credit score at once.  Every time the account is resold.  Which looks like every 12 - 24 months.  Nice.  Inquiries are 10% of my score and the fewer the better.

So what does this all mean to a lender in a nutshell.  I SUCK! 

I'm maxed out, over limit, don't pay my bills on time, have a lot of new accounts and all in a short period of time (length of credit history).

 

So, how do I plan on fixing this?  PAY MY COLLECTION ACCOUNTS OFF!! 

When I click on the FICO Score Simulator on any of the credit bureaus it keeps telling me over and over and over again.....my score will be 708 if I pay down 90 - 100% of my balances and pay all my bills on time.

Every time I saw this I would curse FICO to heck and back.  I'd yell at the computer screen, "what the heck do you mean?!  I paid all my bills on time.  My credit card balances are close to zero.  My score is still low you a#$@@*^!".  Not one of my best moments.

 

Then I realized what that benign statement meant. 

The collections accounts were killing my score.

1.  My balances were too high

2.  They were reporting that I was not a great bill payer with monthly missed payments.

3.  They were new accounts that were shortening my length of credit history.

 

If I got rid of the collection accounts, there will be no more missed payments, no more new collection accounts, no more high revolving credit balances.  It would be a MAJOR change to my credit report and therefore my FICO Score.

 

Spring Cleaning
Mood:  incredulous

This is not advice.  This is not a solicitation.  This is not advertising.  This is just a personal journey of one person, me, to raise a number called FICO.