What is a FICO score?
A FICO (Fair Isaac Corporation) score is a number that provides an overall view of a consumer’s credit reports. It is a quick and efficient way for lenders to find out how much of a risk is a consumer to grant a loan. The higher the FICO score, the better risk a consumer is.
The most important part of a FICO score is the consumer’s payment history, which makes up 35 percent of the score. The second most crucial aspect is utilization, which makes for 30 percent of the FICO score. The remaining parts which make up a FICO score are; length of credit history (15 percent), new credit (10 percent), and credit mix (10 percent).
If the range of the score is between 300 points to 850 points, then 550 points are related to payment history, and 165 points come under utilization. These are many points to consider and fight to achieve the best FICO score for future financial prospects.
What is utilization, and how is it calculated?
There are five critical components when it comes to utilization;
- Individual card balances
- Total card balances overall
- Number of accounts that have balances
- The amount owed on different types of accounts
- How much installment is owed versus how much was originally borrowed
These five components determine how many points a consumer is awarded under the utilization category. They are, according to FICO, and are always evolving based on the score models and their different variations. The most crucial component is the overall utilization.
How does utilization affect FICO points?
In this scenario, a consumer who has a one to 7 percent utilization rate will be awarded 65 points, a consumer who has a zero percent utilization will be awarded 55 points. Having the accounts paid off will give about 10 points less compared to having a one to 7 percent utilization.
Having a zero percent utilization or having paid off accounts, although good in theory, is suitable for another scenario because you have no debt and no rolling balances. But when it comes to the consumer’s credit score, there is probably going to be a 10-point difference there; a 10-point decrease compared to having a one to 7 percent utilization. So, one to 7 percent utilization is the best utilization to have.
The next level is eight to 19 percent, where the consumer gets about 50 points. Furthermore, a consumer receives 45 points between twenty to 29 percent. This is where we get into that, less than 30 percent saying 31 percent or 30 percent, or more like 30.1 percent or more to 50 percent, you’ll get about 40 points. And here is when a considerable drop occurs; a significant decrease is when the consumer receives above 51 percent utilization. And then, when they get to about 90 percent utilization or higher, the consumer is only given about 15 points.
Hence, this is why when someone is maxed out or close to maxing out their credit cards and then they pay off their accounts down to 1 to 7 percent. This is when the consumer will quickly see a good increase in points such as by 40, 50, or even 60. Because when it comes to the number of points that the consumer is awarded, FICO will assign the most points possible in the utilization component for utilization overall that is between 1 and 7 percent. So, it likes 1 to 7 percent utilization better than zero percent utilization.
Therefore, to answer the original question, it is better to have a bit of balance in an open account. The consumer has to pay attention to the date when the statement is closing, to make sure the balance is available, as every creditor is different.
For example, OpenSky is a secured card. They report all of the balance information, such as Visa payments, to the Bureaus on all their users on the last business day of the month, not a day before. On the other hand, Credit One Bank is based upon the user. They report the information three to five days before the statement close date. So, the key is the date when the account closes.
How can a customer find out when the banks will close the statement?
It is straightforward to find out; by calling the credit card company to ask for information or look at the date at the end of the statement or created. And that is when the account should be paid down to between one to 7 percent before the statement closes.
That is when the creditors report the information to the Bureaus. And most importantly, the balance has to be paid before the statement closes.