Periodically FICO tweaks their scoring formula. The last big change, called FICO ’08, got a lot of publicity because of a battle over proposed changes to authorized user account scoring. But FICO ’08 also put more emphasis on the relationship between revolving balances and account limits, a lot more. Here is a little handy credit repair information about revolving balances and credit scores.
Surprise, Your Scores Dropped 100 Points
Because of the battle over authorized user accounts, combined with Fannie-Mae and Freddie Mac’s implementation schedule, FICO ’08 didn’t get fully rolled out until the end of 2009. So the changes are fairly new – as is the shock people are feeling when their credit scores drop 100 points just because a credit card balance gets reported near the limit.
A Simple Mechanism
FICO recognizes a number of limit usage markers in 20 percent increments, including 20, 40, 60, 80, and 100 percent usage. A change in a balance between markers has no effect, but if your balance goes over or under one of the 20 percent markers your score will be adjusted. As always, the lower the balance, the higher your score will be. More specifically, for the best results get your revolving balances under 20 percent.
Little Cards Big Impact
The balance score connection is so sensitive now that you can lose 100 points if you let a credit card balance go over 80 percent of the available limit. This takes people by surprise, as a huge drop can be triggered by usage of even the smallest credit card. Members of our credit repair service often use small secured cards to rebuild their credit. These can create awesome score improvement, but they typically have a modest 300 dollar limit. It is easy to get the balance up over 80 percent.
No Harm Done
The good news is that your scores are instantly responsive to a balance reduction. So if your scores got pummeled because of a high balance, just pay it down and your scores will pop right back up. You do have to allow the creditor time to report the new balance to the bureaus, a process that typically takes 45 to 60 days. But there will have been no long term damage done to your credit repair progress.