What Doesn’t Help Your Credit Score

Your FICO score is not a report card grade

One cardinal rule for financial health is to avoid accumulating credit card debt in the first place—it’s a clear sign that you’re not living within your means. Compounding matters, interest is not tax deductible, and rates are outrageous. So if you never carry a balance from month to month—but pay off your account balance diligently—you should have a great credit score, right? Wrong!

Remember that your FICO score is not a report card grade on your overall financial health. It is merely a prediction of whether you can pay on time. “But,” you protest, “I do pay everything off on time every month. Why don’t I have a perfect score?” As intuitive as this sounds, it is irrelevant for two reasons.

First, the credit reporting bureaus know only the amount owed on your most recent statement. They can’t tell if the amount is from new purchases or from old balances carried forward. Remember, it’s the timeliness and the debt-to-extended credit ratio that constitutes two-thirds of your score, not the “age” of the debt.

Second, throughout 2009, banks have been quietly paring back the credit they are willing to extend to anybody, even their existing loyal customers. In 2007, your credit card limit may have been $12,000; now it’s $9,000. Your average monthly $3,000 bill used to be only 25% of your available credit. Now it’s 33%, which will significantly lower your FICO score. That you pay off the $3,000 every month makes no difference. The days of rewarding financially prudent customers are over!


By Deborah Hoskins, JD, CFP
The Wise and the Wary Blog