FICO “Balance and Burden” Key
This Essay is aimed at the more advanced Student of Credit Repair. Those who are just beginning to study credit repair can benefit from reading also. Then file away to come back to it later.
In the familiar pie chart that breaks down the importance and weight of the various components of your FICO credit score the second most important category after timely payments is called “Capacity Used” or sometimes “Credit Utilization”. Many of the self described “experts” writing on the subject simply treat this as the aggregate amount of credit in use weighed against the total amount of available credit. They will tell you that if you keep this under 30 per cent you will be fine.
This is a myth that is so persistent that it will never end. It is repeated by writers and columnists who simply parrot what others are saying. Let’s peek under the hood and see the actual laws and FICO policies as they really are. The truth is aggregate utilization is one component of four components in the FICO “Balance and Burden” Category.
FICO “Balance and Burden” Components
It has often been said the “devil is in the details.” By neglecting the internal details of the category they like to call “capacity used” these so called experts are doing their audience a grave disservice. Just knowing the details of this category will help anyone add valuable points to their credit score by making smart moves. The components of FICO “Balance and Burden”are:
- Aggregate Utility This is the component everyone knows about. It is a measure of how much of your available credit you are using. If you have 1 credit card with a $5000.00 limit and you are carrying a balance of $500.00 you are using a low 10 per cent of your available credit which is good. You can then simply add up the sum of the limits on all your credit cards and compare that to the sum of all the balances you are carrying. Whatever the percentage of debt to available credit is relative to the sum of your credit limits is your aggregate utility. The lower this is the better for obvious reasons. We are just talking about revolving debt here as in credit cards without factoring in installment loans such a car payments and mortgages.
- Line Item Utilization This is the utilization on each individual credit card. You don’t want to have any one card carry too much of the burden.
- Accounts with Balances How many of your accounts carry balances at any given time? Even small balances carry some negative weight.
- Aggregate Types of Installment Debt Do you have different kinds of Installment Debt? Can you handle a personal loan, an auto loan, student loan, mortgage, furniture payments?
- Aggregate Revolving Debt How many different types of credit cards do you have? Gas cards? Store cards? What is the sum of all this debt?
FICO “Balance and Burden” Lessons to Remember
Don’t misunderstand me. Aggregate utility is the most important component of FICO “Balance and Burden”. To squeeze more valuable points out of this category remember:
- That low limit credit card that charges you your annual fee in monthly increments will always show a balance even if you pay in full every month. Merrick and Credit One are cards that do this. This ever present balance is a negative factor in Accounts with Balances. See if the card will let you pay ahead. If you don’t really need it you should consider getting rid of it.
- Keep the debt to available credit ratio as even among your credit cards as you can. If you need to make a large purchase in an emergency use the card with the highest limit to keep the individual ratios within a reasonable distance from each other.
- If you don’t have any installment debt of recent times you might consider a “credit builder” loan from your credit Union. Most will let you use a CD as security for an installment loan of equal amount and report your regular payments to all 3 credit bureaus. Finance at least some of the price of that new car. Good automobile payment track records have the added effect of building up your special FICO auto score as well.
The debt to available credit ratio is weighed differently for installment loans than it is for revolving debt. The system is far more forgiving of high installment debt ratios than it is for revolving debt to available credit ratios. All installment loans start out with a high debt to available credit ratio which diminishes with each payment.
When it comes to revolving debt don’t believe the “experts” who say 30 percent is fine. It isn’t fine. 10 Per cent is fine but even less is better. Pay the cards down as far as you can a month before applying for a loan. The scoring system is a “snapshot” of the report at that moment. It doesn’t remember what went before.
And finally…Don’t believe that you need to carry a small balance on your credit cards. The exact opposite is true. The scoring algorithms have the highest respect for your ability to carry a zero balance on most or all of your credit cards.
