Credit Scores

Any active consumer knows the impact their FICO score can have on the interest rates they have to pay when borrowing money. Even those who have stellar credit histories are experiencing declines in their FICO scores due to a decrease in the total amount of available credit being offered by lenders.

One of the biggest components in determining your credit score is something called a "credit utilization ratio." In the FICO mathematical equation the amount of available credit in relation to the actual amount being used heavily weights the ultimate rank you earn. Ultimately the equation wants the consumer to have a high amount of credit with only a small fraction being used at any one time.

That was all fine and dandy when credit card issuers were happy to open up the lines of credit for those who deserved and until recently it was not uncommon for credit cards to provide their customers with tens of thousands of dollars in credit. However, in a move to mitigate their chances of loss, banks are reducing the amount of available credit that was already previously issued to consumers. That decrease in available credit in relation to debt being carried is negatively impacting the FICO score of many thus pointing out the overall fault in the scoring system.

Unfortunately, the FICO system, (created by the Fair Isaac Corporation) is the most common factor when determining the amount of money and individual will be charged when taking a loan of any type. Statistics indicated that arbitrarily, a minimum of30 million Americans had their credit limits reduced in the second half of 2008. As the economy has yet to rebound, that trend is expected to continue.

In the prior year, it was previously announced that there would be revisions to how the FICO scoring system would change and that consumers should brace themselves for the new changes. As of the middle of August six changes to the existing system occurred and the FICO criteria has been altered in ways that you should be aware of. Although the "secret sauce" remain the same, the behaviors backing those numbers will be viewed very differently. From this point on consumers need to be aware that:

• Debts under $100 that were previously reported no longer have any impact on your overall score
• The total overview of your past behavior is more important then a single credit indiscretion so a missed payment or repossession from a couple of years will be negated with good overall debt management behavior
• Credit scores for children and spouses can be improved if they are put on an existing account as an authorized user of someone with great credit this changes the practices of "piggybaking" to increase one's credit score
• As always the credit utilization score is still extremely important. The less available credit (meaning the more tied up with debt) the lower your score will be
• In that vain, closing accounts will also decrease your utilization ration so if you are no longer interested in having a particular account, pay it off in full and lock your credit card in your safe. Use it periodically for small amounts and pay off the charges immediately to ensure that the account stays active
• Variety is the spice of life with the implemented FICO score changes. With a mix of loan types varying from credit cards, to mortgages and personal loans and responsibly handling them all, you can raise your score

It may appear that these behaviors were made to benefit the card holders, but they have been put in place in order for lenders to better estimate the risk behavior of potential borrowers. Many lenders have already made the changes to their system to accept the new rates from FICO '08, however some, like Freddie Mac and Fannie Mae have yet to get fully on board with the program.

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