Understanding FICO Scores - Amounts Owed

Having credit card accounts and having balances on them does not necessarily make you a high-risk borrower. However, when a high percentage of available credit is used up the FICO score can be adversely effected. The general rule is to try to keep your balances under 30% of the total available limit of a credit card. For example, if one had a card with a 10K limit, a good idea would be keeping the balance under 3K. The amount owed on all accounts plays an important part in the scoring as well. Even when one pays their accounts off in full each month, the credit report usually reports the total balance shown on the last statement. The amount owed on all accounts and on different types of accounts is also a factor. Sometimes having a small balance on a card and managing it responsibly can have a stronger positive impact on a credit score then just closing out an account. If a large number of accounts are carrying balances, this could give the perception to a creditor that an individual is over-extended. Paying down mortgages and installment loans play a very important role in terms of credit scoring. The main idea here to understand is that having balances is not in itself a bad thing, but as one gets closer to the limit on the credit lines the scores tend to go down

Understanding FICO Scores - Payment History

35% of your credit score will be based on your credit payment history. One of the most important factors a creditor will want to know is if you have paid your past credit accounts on time. It should be noted that if you have late payments in your payment history it does not automatically ruin a credit score.

An overall good picture can outweigh one or two late payments.

Remember when discussing payment history we are including more then just unsecured credit card accounts. Payment history would include car payments, mortgage payments, installment loans, etc.

Certain items that would be considered fairly serious would include public records, bankruptcies, foreclosures, wage attachments, judgments, child support payments, and collection accounts.

The specific details of when an account was late makes a large difference. For example an account 60 days late 2 years ago might not be as damaging as a mortgage payment that was late last month.

Often times it is possible to improve a credit report by having old and inaccurate items removed. We will talk about credit reports in future installments.