Even though I said that a good FICO credit score takes a long time to build, there are situations where time is against you and the last few points really matter. Many mortgage lenders have FICO score thresholds for interest rates, and you may fall a few points short of the next threshold which may mean thousands of dollars’ worth of payments. You don’t have another few years to carry your FICO score to that threshold. So what to do?
For those that are very familiar with FICO credit scores, you know that there is a way to maximize your FICO score with what you already have. The keyword is utilization.
In the FICO score breakdown, amounts owed account for 35%, and an important metric for amounts owed is credit card utilization, the ratio of total reported credit balances to total reported credit limits.
Most credit cards report the balance to the consumer reporting agencies once a month, usually when a new credit card statement is generated. When a consumer reporting agency receives the updated information, they will update your credit report, and consequently, your FICO score will also get updated. In a month’s time, you can plan the balance on each credit card to get reported in such a way that maximizes your FICO score.
From personal experience and research, I have found that FICO scores are maximized when only one of the credit cards reports a non-zero balance, and that non-zero balance is less than 5% of the limit on that card. In addition, the card should be the one with the highest limit.
For example, suppose I have 3 credit cards with respective limits of $2,000, $8,000, and $10,000. To maximize my FICO score, I want my first 2 cards to report $0 balances, and the last one to report a balance that is greater than $0 and smaller than $500.
Compared to the situation where I have all 3 cards reporting balances that are over 20% of the respective credit limits, I can achieve 10 points higher, and save myself $1,000 a year on mortgage payments.
And use that to buy some good ski gear for the ski season in Colorado. 😉
All it takes is not using 2 cards for a month, and closely monitoring the balance on the other card to make sure a desirable balance is reported. Keep in mind that you absolutely do not want all 3 cards to report 0 balances; otherwise your score will drop. Remember, greater than 0, smaller than 5%. As simple as that.