Originally published August 9 2005
Managing your money can be easier by understanding credit scores
by Mike Adams, the Health Ranger, NaturalNews Editor
Credit scores and reports can be a bear to understand, but with some advice you can learn how to understand them and how to manage your money better.
She wrote: "In your column, I have read that if you use over a certain percentage of the credit on your credit cards, it will lower your FICO score.
The credit-scoring algorithm looks at the credit utilization rate for each active account and, separately, a person's credit usage for several accounts together, said Craig Watts, public affairs manager for Fair Isaac, the company that created the FICO credit score used by many lenders to evaluate consumer credit risk.
* Credit utilization for each active installment account you have, such as a mortgage, auto or student loan.
Three of the cards have zero balances.
The fourth card has a balance due of $5,000, making you maxed out (100 percent credit utilization).
Generally, you don't want to use more than 50 percent of the available balance on any one card and you don't want the combined utilization to be more than 50 percent.
In addition, Watts said, the FICO scoring model gives more weight to your credit usage on revolving accounts than on installment accounts.
"People have more flexibility with borrowing and repaying money to revolving accounts so their activity on those accounts is more indicative of their money habits and more predictive of future behavior," he said.
"Installment loans require payment of the same amount month after month, so while that activity is predictive, it isn't as valuable to FICO scores as activity on revolving accounts."
* Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).
Watts said it's important to note that someone who has only one credit card account - no loans, no other credit accounts reported to the bureaus - would find that her credit score will suffer more when her credit report shows that her card is maxed out.
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