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Archive for September, 2008

Question: For Credit Scoring, is credit utilization ratio on a continuum, or are there "tiers" (e.g. 30/50/70%)?

I've heard that people should optimally try to stay under 30% on their credit utilization ratio to maximize their Credit Score. And if not under 30%, then under 50%, etc. This implies that there are tiers, with actual cut-off points, and that the credit utilization ratio is NOT on a smooth continuum.

Are these just arbitrary numbers being thrown around, or are they based on actual features of the Credit Scoring system? For example, is there actually a larger difference between ratios of 49% and 51% than, say, 47% and 49%?

Please cite your source, if you have one. Thanks!

Answer: FICO likes to keep people in the dark when it comes to their scoring formula. Utilization is only a part of their formula and trying to understand even that may make some peoples head swim.

With that said...

Generally a good rule of thumb is that the best utilization factor is between 1% to 9%. Scores may lower at roughly every 10% utilization point.

Not only is there an overall utilization, there is also individual account utilization.
If you have, for example, 10 credit cards with a total credit limit of $10,000 ($1000 per card) then if you carry a total balance of $1000 you would be at 10% utilization overall - but, if you carry that $1000 on one single card then your individual card utilization would be 100% , which would hurt.

Also add into the mix, if you have balances on all 10 of your card accounts your scores will be dinged for that. FICO would rather see usage across several of the cards rather than just on a single card or on over somewhere around 50% of your total cards.
You could also be dinged if "all" of your accounts are at a zero balance.

To put it simply (if there is such a thing with scoring lol),

If you are going to make a large purchase (mortgage, car loan, etc.) or if you just want to have the best scores you can, try to keep your utilization between 1% to 10%.

If scoring is not that big of a factor.. you already have decent accounts, you are not looking to apply for credit, etc., you just want to maintain what you have, then try to keep your utilization somewhere between 1% to 30%.

At times a person may do a balance transfer or make a purchase that brings their utilization up. If that is done then the best thing to do would be to try and keep the utilization on most of the other cards at 0% and on a couple of the cards as close to 1% as possible and also to try to bring the high utilization down as quickly as possible.

Personally I dislike doing a transaction (purchase or balance transfer) that would bring my utilization up over 45%.
If I happen to make a purchase that would cause my utilization to rise over 45% then I will either make a full payment before the statement cuts or I will make a partial payment before the statement cuts that will drop the utilization down to what I consider to be an acceptable level.

What is a credit utilization ratio?

How to cope with personal bankruptcy

Many people feel embarrassed when bankruptcy becomes an option or a choice for them. It is important to remember that bankruptcy was invented to help people, and that it is ok to find yourself in a situation where you need help. Bankruptcy can relieve a lot of stress in a much faster way than most other options. While it is important that you try to avoid filing bankruptcy as much as possible, filing bankruptcy can be a good solution to your situation.

What should I think of a personal bankruptcy?

Think of a personal bankruptcy as a reorganization of your finances and as a way to get your debt (and stress) under control. Bankruptcy gives you a fresh start. Do not let yourself fall into the same traps again after your bankruptcy. Also, do not feel embarrassed or demeaned about going through bankruptcy. If you are going through a bankruptcy or about to have to file bankruptcy, contact us. There may be other solutions or loopholes in the system that may have been overlooked.

Reaffirmation Agreement

If you do file for bankruptcy, you will be surprised to find that often as you literally walk out the courtroom door, you will be stopped by a representative from one of your creditors. This representative will offer you new credit if you agree to reaffirm your debt with the company, in other words, agree to owe them the money that your bankruptcy just wiped out.

Many consumers have fallen into this trap and have found themselves deep in debt almost immediately after a bankruptcy. Do not agree to anything to right away. Take some time to reassess your financial situation.

Remember that reaffirming a debt you have just wiped out can be a foolish move. On the other hand, if it is a small amount, it might serve your purposes to agree to reaffirm it so that you can have immediate credit with that company. There are many agencies and organizations available to assist you.

Question: his Credit Score is fair... mine is poor...loans?

my fiance has a fair Credit Score and mine is unmentionable. when applying for our first home loan, would it be better for him to apply by himself or file together with a joint income?

Answer: When buying a home, they will look at both your reports.
They will ask if you are married, if so, they will request both of your reports whether he buys it on his own or with you.
He can buy the home before marriage.

But... do you really want him to own the home without your name on it.
You will probably be helping pay that mortgage - maybe for decades.
If you divorce, the home will be in his name only and you won't get one single dime of it.
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