Maybe you think you know all there is to know about your credit score. Don’t pay late; don’t have a slew of maxed-out cards. It’s true that those things are important, but credit scoring is a complicated process. There are many variables that go into that three-digit score, according to Barry Paperno, consumer affairs manager at MyFICO.com, the consumer site for credit scoring firm Fair Isaac Company. Here are a handful of factors even financially savvy people don’t generally realize have an affect on their score.
Don’t max out even one card. You probably know that you shouldn’t max out all your cards — not only will that torch your utilization ratio (the percentage of your available credit used up at any given time), but multiple payments at possibly high interest rates increase the likelihood that you won’t be able to keep up with your payments. But maxing out just one credit card can also hurt your score. The part of the FICO formula that looks at your utilization ratio looks at how much credit you have available overall as well as with each individual card. In a simulation conducted by FICO, Paperno says maxing out a single card causes a drop of between 10 and 30 points for someone with a score of 680. With a higher score, the decrease is more significant; maxing out a card with a score of 780 erases between 25 and 45 points.
Time matters more than you would expect. Credit experts counsel people who want to improve their score to be patient; it takes years to build an A-plus credit history. But for the best possible score, we’re talking decades, not years. Looking at people with scores above 780, which FICO classifies as “high achievers,” shows that the oldest account people in this group have is an average of 20 years old. What’s more, high achievers haven’t applied for any new credit within the past 26 to 33 months, on average.
Opening a bank account could ding you. There’s been a lot of discussion lately about switching banks, with consumers annoyed by new fees and requirements some large banks are charging. Take your money elsewhere, but be advised: Your score could take a hit, albeit a slight one. Paperno says some (although not all) banks will pull your credit when you apply for a deposit account. Any inquiry by a potential lender is registered on your credit history, and it pulls your score down by a few points. “The typical inquiry will count for less than five points,” he says. This shouldn’t be enough to stop you from switching the place where you keep your money, but if you anticipate applying for a big loan like car financing or a mortgage within the next few months and your credit score is right on the edge of what you need to qualify for the best rate, it might be best to hold off until after you snag that prime rate.
All credit cards aren’t created equal. Paperno says older versions of the FICO scoring model assigned a higher preference to credit cards issued by national banks compared with those issued by small banks and credit unions. This discrepancy has been eliminated in the newest FICO formula, but the problem is that some lenders still use the old version. Paperno says the difference it makes in your score is just a few points, so this shouldn’t make a difference to most consumers. Unfortunately, though, there’s no way to find out beforehand which FICO version a particular lender uses.
Not using any credit will backfire. Using a tiny amount of your available credit is actually better than not using it at all, according to the scoring formula. Lenders want to see that you know how to use credit wisely and that you can use credit cards in a disciplined manner. If you freeze your credit cards in a block of ice in the freezer, that’s not going to give a lender confidence in your financial self-control. This doesn’t mean you should go out and run up big balances. Use your card to pay for something you’d have to purchase anyway (like your bill for Internet connectivity) and pay it off in full every month.