Factors of a FICO Score: Utilization Rate

March Newsletter

Welcome to this month’s newsletter. If you have been keeping up with the news, you know there is all kinds of “stuff” out there over the stimulus package. As far as the housing market goes, we are still not sure what that means, but stay tuned!

Here is what I do know so far…FHA now requires 3.5% down payment. It used to be 3% and they just raised it, with the thought that if folks have a little more skin in the game, they are more likely to be successful. Therefore your option payments will come in handy for this. If you are likely to use a VA loan, then the option payment will be applied to the purchase and come off the purchase price.

Next big thing…is the first time homebuyers tax credit. It has been changed slightly. The time frame has been increased, so that anyone that purchases a home in this next year can qualify if this is the first home or they have not owned a home in three years. The other change is that it is now for $8000.00 and not $7500.00 and if you live in the home 3 years after purchasing it (owner occupied for 3 years) you do not have to pay it back. So, anyone that gets qualified this year will get a tax break!! Another good reason to work on getting financed this year…Thank you Uncle Sam!

So, let’s get started. You are now well aware of what a FICO score is and why it is so important. We have reviewed the 5 most important factors that are considered in the credit score formulas are:

I thoroughly went through what your payment history involves and that it is very important that we change your history now… You want your scores to reflect a positive payment history; that you make your payments and you make them on time. You do not wait until the due date to mail your payment, you mail ahead of time so that it arrives and is processed by the due date. When you start paying like this your scores WILL go UP! Then, you organized your budget so that you would make the correct amount of payments on time or early every time

This month’s letter will focus on #2 of the Important Factors listed above “How much money you owe”. This score is based on something called your utilization rate or in English what is the percentage of debt you owe. In other words, how much money do you owe compared to the total amount of credit that you have. This is not a grand total of all credit cards but each one separately. For example- you have a $10,000 credit limit on a credit card and you spend or use $3000 total over the past few months. Then your utilization rate would be 3000/10000=33.33%.

Credit cards are called “revolving accounts”. This is not a debit card/bank card or a department store card. These are the VISA®/MasterCard®/American Express®/Diners® cards. They all report to the credit bureaus monthly. To increase or maintain your credit score your balance on any one card should ever exceed 30% of your total limit. Furthermore, the more of these you have and pay on time with a low utilization rate the better. This is why it is suggested that you have more than one revolving account, because it is better to have 2 credit cards with less than 30% utilization rate than one card at 60% utilization. Even if you pay the card that has higher utilization rate on time, your credit will not improve as much as it will if there are 2 cards with less utilization. This does not make logical sense but that is the way it goes. We are here to learn how to work within the system, not change the system!!

So, what will this tell lenders???? They believe that my keeping your utilization rate at 30% or below AND paying your payments on time you can responsibly use credit and you can pay off more than one thing at a time. It is more typical to have more than just one payment – like a house, a credit card and a car. Lenders like us to be evenly balanced!!

So, the goal is to first have some type of revolving account like a credit card and keep the usage low- below 30% of the total and pay on it each month on time. Your scores will slowly but surely improve. The extra bonus to doing this is that you will qualify for an increase in your credit limit which you can request after 6 months of consistent payments.

Beware of overextending yourself.
You do not have to rack up debt to use up the 30%! All I am saying is if you have to build good credit you would benefit from a small purchase on a credit card each month like a tank of gas per month and pay most of it off. If you can afford more , that is fine, but figure out on your calendar how you can budget this in and add it to what you are already doing.

To recap….you want to have a LOW utilization rate. The goal is 30% or less for each credit card. You should be making payments on time or early. Credit cards will consider you late even if your postage is on the due date. The date they put as due is the date that your payment should be processed on or before. For example if the due date is February 15th then your check needs to be posted by them on the 15th or before. This is the only way your score can improve for this area.

Okay…you got one more notch on your belt. Don’t forget if you have questions or need some assistance with improving your credit call your finance specialist first and if you need more assistance they will contact me if there is anything that I can do. Your finance specialist can get credit issues solved faster than I can, but I will help if needed.