Score Watch Alert (Your FICO Score Has Gone Up)

Finally, after two months of lying dormant, my FICO score has begun to crawl upwards! By four points! A small victory, sure, but I love the feeling nonethless :)

This has inspired me to post a blog or possibly a series on credit scoring. This post will focus on FICO scores, but keep in mind that other scores do exist and are sometimes used. Since the majority of the scores pulled are FICO we'll focus on that for now.

FICO Basics
I'll start with the basics. Banks and lenders generally use FICO scores to gauge the risk of borrowers. When you go to open a credit card, take out a loan, mortgage, possibly even rent an apartment or apply for a job... someone is checking out this score. When I say this score I actually mean one of these scores. Each of the three credit bureaus has an independent score for you based on some magical secret formula. The whole system is kind of shady so the most you can do is work towards keeping yourself in check and hope for the best. You hope for the best because this number effects the interest you pay on just about everything. Good luck.

FICO Logistics
Just for your information Fair Isaac has been nice enough to share some common generalities used by the credit bureaus (TransUnion, Equifax, Experian) to determine your score. Below you will see a graphic that illustrates these generalities in a colorful pie shaped format courtesy of myfico.com. They do not take things that aren't on your credit report into account such as your income, employment, student status, or type of inquiries.

Checking Your Credit Report
Everyone is entitled to one free credit report from each credit bureau per year. For this you'll want to go to annualcreditreport.com. According to the Federal Trade Commission website, this is the official site to for your free credit reports regardless of what other advertisers may lead you to believe.

Checking Your FICO Score
Keep in mind that your credit report does not show your credit score. It is my understanding that myfico.com is the only place to get your real FICO score. Here you can view scores and detailed reports from all three credit bureaus. Its also just a great resource for learning more about the FICO scoring system in general.

Be sure to Google search for myFICO coupon codes before you purchase! There are always some floating around from 10-25% off. Try CPPSAVINGS for 20% off or go here to search for something better. Now for my favorite part about myfico.com....

Score Watch
I track my Equifax FICO score and credit report through Score Watch. Originally I just signed up for the free trial, but I got hooked on score watch alerts and discussion forums. Now I'm holding on to it until it comes time to refinance my mother's rental home. We expecting to do that in about six months or so. She took out the mortgage over 20 years ago, with a small down payment. Now she has almost 60% equity, but her interest rate is at 9%. We're hoping that the mix of her good credit and my income will reduce her monthly payment and allow us to take out some money to upgrade the HVAC system. I'm hoping to be into the 700s by then.

So here is one real life example of how financial decisions affect your FICO score. I've annotated a couple points of interest. Read on for a discussion of each.

A. Just checking the score here. I'm fresh out of college and working hard to take control of the finances. Thinking about getting a consolidation loan or possibly doing a balance transfer. Plus what is this crap Chase keeps giving me about high credit risk? I've never been delinquent or more than 30 days late on a payment. Turns out my major dings were:

• You've made heavy use of your available revolving credit
• You have too many credit cards carrying balances
• Length of credit history not good
  

Yes, that makes sense. I have 9 accounts with balances totalling almost 20k... Um yeah. I have had credit for almost six years but the average age of accounts is more like 3 years. Fair Isaac is not impressed.

B. Opened a new Citi card with a one year 0% balance transfer and a National City Card with 0% for 6 months. I also found Prosper and was funded for a loan that cut my interest rates in half. Right on, Prosper lenders, I can't thank you enough. All great moves financially, but bummer on the credit score. It takes a nose dive right along with length of credit history and introduces:

• You recently opened a new credit account

The more you ask for credit the more desperate you look. Think about how attractive that guy at the bar looks after flashing plastic smiles and cheesy pick up lines to the four girls to your right... and now here he is asking your sign. Yes, this is what you look like to lenders. But hey, sometimes a girl need to eliminate some finance charges. Please?

C. Paid down all of the high interest card balances with my 0% transfers and loan. This consolidated my debt into only 5 accounts and Score Watch has alerted me that the following factors were not hurting me as much as before:

• You have too many credit cards carrying balances

Rock and roll. I've completely eliminated my Chase balance at 29.99% and a Discover Card balance with 28.99%.

D. FICO score is not happy when I open a Meijer card to save 30% on the perfect desk for my new apartment. I can understand, but I'm still happy with my decision and I promise to pay off the balance as soon as I get my bill. I don't want "You have too many credit cards carrying balances" coming back to haunt me...

E. Apparently waiting-for-the-bill-to-show-up affects your credit report even if you plan to pay the balance in full each month. "You have too many credit cards carrying balances" is hurting me slightly more than last month thanks to the Meijer charge.

F. Here I paid off the Meijer bill and another remaining small balance account. "You have too many credit cards carrying balances" has been subdued for now.

G. Then I decide to max out the National City card with the 0% balance transfer offer. This drastically reduces my monthly finance charge payment, but my FICO score plummets :(

• You've made heavy use of your available revolving credit

The interesting thing about credit utilization (Amounts Owed in pie chart) is that it counts each individual account and the sum all of your accounts. In other words, you have Card A, B, and C with limits of 1000, 4000, and 5000. You want to bring credit utilization below a certain level. I haven't gotten a unanimous figure for this - the sweetspot is somewhere between 10% and 30% - lets assume its 25%. To make your credit score happy, you are going to want to stay below 25% of total limits (less than $2500) and less than 25% of each card's limit ($250, $1000, and $1250 for card A, B, and C, respectively). Maxing out any one card will ding your score. If you're looking to increase your credit score try to keep this in mind because it could go against everything that Dave Ramsey and PF bloggers have taught you: if you have a card that doesn't have the smallest balance, doesn't have the highest rate, but its the only one close to the limit consider paying it down a bit to improve your credit score.

H. This upward slope is just me attacking debt. Also Chase and Discover both raise my credit limits in desperate, pathetic attempts to win back my love. I decide to use their cards... for rewards! Suckers!

I. The plateau. I hear very little from Score Watch these days. I keep chuggin along, trying to reduce those high balances. I am successful in using rewards responsibly. I mostly stick to budgeted expenses and ALWAYS pay off the balances. I try and try to find more ways to get ahead, but its just going to take time...

J. Score Watch Alert (Your FICO Score Has Gone Up) This particular alert does not coincide with any major financial decisions. Just hard work and responsible repayment. It feels great.

This is just the beginning. I expect the future of the graph to be a slow upward trek. When I finally pay off this debt I'm going to have A+ credit and you know what? I'm not even going to think about using it. At least not the way I have in the past.

From now on my money will be used to make interest, not pay it!

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See also:

• Score Watch Alert (Welcome to the 700s!) @ Me vs Debt
• I Have a Great Credit Score @ Free Money Finance
  
• Bank Girl's tips on Improving Your Credit Score