So you walk into a store and apply for some type of credit and your Credit Report is pulled and you are denied due to your Credit Score. As you stand there, embarrassed, thinking to yourself “how can my Score be low if I have never missed any payments in my
life”?

I receive many calls saying “I am 53 years old and my Credit Score has never been over 670 and I have never missed a payment on any accounts. Why don’t I have higher Scores?”

“Help!! My Scores are going down and I am not missing any payments.”

These are actual phone calls and questions I get repeatedly.

Revolving Debt. Credit Card Debt. This is the answer to the above scenarios. There is a LOT more to Credit Scores than just paying your bills on time.

You have to remember, the Credit Score does NOT tell you if you have good or bad credit. What it tells you is how you handle your
credit, manage your credit and repay your credit.

The FICO (Fair Isaac) Scoring program looks at revolving credit completely different than it looks at mortgages or installment loans. When you have a mortgage or installment loan, you borrow a set amount, repay a set amount each month that reduces your balance based on those payments. Revolving debt fluctuates and there lies the problem.

With a credit card, you can have a $2.00 balance today and a $10,000 balance tomorrow. The higher the balance, the higher the monthly payment, the higher the monthly payment the more questions the scoring program asks itself when its looking at your report. Can you handle the additional debt? Can you handle the larger payment? Have you over extended yourself?

The Scoring program looks at revolving credit 2 completely different ways. The first way is that it looks at each revolving account that has a balance. What it wants to see is the balance on that account at least 50% of what the limit is. (example: if your limit is $1,000 and your balance is $499. This will not hurt your score as much as if the balance was $501 and the higher you get to maxing out the card, even if you are paying on time will take points off of your score). If you are utilizing a high percentage of the debt you have available to use, you are NOT handling and managing your credit good and the program will deduct points from your score. In turn, the closer your balance is to zero, the better you are handling and managing it and you will get points on your Score.

The second way it looks at revolving debt is that it looks at how you handle your TOTAL revolving debt. What it does here is the program looks for all OPEN revolving accounts (with balances and zero balances) and adds the credit limits on all of those accounts. Then it looks at how much of that you are actually using and it all comes down to percentages. (example: If you have $10,000 of total available credit and are using $4,000 you are using 40% of what you have available so you are handling and managing this good and you will get points on your scores.)

NEVER NEVER close your credit cards as this will have a negative impact on your Scores and is the number one credit myth out there. When you close accounts you are reducing the amount of credit you have available and will make whatever balance you are using look worse.

Using the example above with the $10,000 total debt available and you are using $4,000 of it (40%). Now someone tells you that if you close some accounts it will help your Score and you follow that advice and close some of those accounts which reduces your available credit down to $6,000. Well you have the exact same $4,000 balance you had before but now you are using $4,000 out of $6,000 which means you are utilizing a higher percent of the credit you have available and will now take points off your score as now you are not handling and managing your credit good. (using $4,000 out of $6,000 is a lot worse than $4,000 out of $10,000)

Debt utilization is a very important factor in the calculation of Credit Scores even if you make all payments on time. Once a credit card hits your report the damage has been done and its better to let it sit with a zero balance, using it every 5 or 6 months to keep the activity current, than to close it.

When it comes to your Credit Scores and revolving debt – “The MORE credit you have available and the LESS of it you actually use, the better it is for your Scores.”

For Region: Chicago

• Gary Novel
• President, Kreditguru, Inc.

(630)624-9557
www.kreditguru.com

Hear the Kreditguru on the TOWNSTONE FINANCIAL SHOW on WIND-AM – 560 on your radio dial Saturdays from 1pm – 3pm.