How to read FICO's explanations of what's hurting your credit score

Dear Opening Credits,My credit score is good -- mid-700s. I've heard that there are things that you can do to hurt your score that don't make sense to me. I got my credit report earlier in the year and was shocked to see several comments. I don't recall the exact statements, but this is my understanding of what they meant:

  • Too many revolving accounts with balances. I have three credit cards I use regularly. At the time, the total balance was around $1,000. I pay the entire balance off each month.
  • Available credit too high. Over the years, several of my cards have gotten updated limits. Discover had me at $21,000. So, I called and had the limits lowered. How much is a reasonable limit to have?
  • Too many revolving accounts. I had a few credit cards that I'd never used. So, I closed the accounts. Since then I've heard a few people say this is a bad thing to do. The only debt at the time was our home mortgage. Paid off my car loan a few years ago. Were my actions in error? -- Donita

Dear Donita,Actions in error? Have some confidence, Donita! You have a terrific credit score. Anything in the 750 range is more than acceptable, which means that even if you weren't trying, you've been doing a lot of things right.

In fact, it looks like you've satisfied the two weightiest factors in a FICO score: payment history (accounts for 35 percent of your credit score) and the amount of debt you have in relation to your credit limit (30 percent). By paying your bills on time and keeping what you owe well below the amount you can actually charge, you've achieved a credit score most lenders would be thrilled with. Check out the box on this page for more information about what goes into your credit score.

Now, what's up with the confusing credit report "explanations"? With such a good score, the statements don't make much sense. Here's why: Many of the comments you are reading are nothing more than stock responses and shouldn't be taken so literally. They aren't actually personalized to your exact situation, but are general suggestions as to why your score isn't at the "perfect" 850.

For further clarification, I turned to Jose Rivas, a financial educator for Consumer Credit Counseling Services of San Francisco (my old haunt). He reviews countless consumer credit reports for this nonprofit organization each year.

"The comments listed seem like the generic suggestions that are written into the mathematical code of the FICO scoring model," says Rivas. "When a credit file is processed by the FICO scoring model, the process will yield a three-digit score, unless you have no credit history, and four recommendations for improving the score. As a person's score gets closer to 850, there is less and less for the FICO model to recommend for improvement, but the process is designed to still yield the four recommendations."

In other words, for individuals like you who have scores in those upper numbers, the explanations about why it's not perfect are kind of meaningless. Why? Because FICO only publishes general information about how a score is determined -- a skeleton, basically, of why your score may go up or down. The meat and bones of the mathematical model they use is proprietary. (They pulled back the curtain a bit in November 2009 when they released some details of how late payments, foreclosures and other mistakes impact your score, but by and large, the scoring remains a mystery.) 

Rivas does question the point about your available credit too being too high, saying, "there is no known drawback to having 'too much' available credit. This is usually a lender's feedback, but not likely to be FICO score-related." And because you don't carry over a balance from month to month, I don't see how lowering your credit line with Discover did any significant damage.

In general, it is best to keep older, well-managed credit accounts open. Doing so helps with the "length of credit history" section of a FICO score. Though a relatively minor factor in calculating your score (15 percent), having a long, traceable record of using credit positively works in your favor. However, your excellent score confirms that the effect of closing them has been negligible. 

As for having too many revolving accounts with balances, I believe the number of credit cards you have is fine. Having three active credit accounts is generally perceived as ideal. It's balanced: You are not a one trick pony with a single card, and you don't have so many that your reports are overrun with random accounts.

In the end, try to not put too much stock in what random people tell you about credit reports and scores. If you have a question about anything financial, whether it's credit reports or investing, go straight to the source. I'm not suggesting that your best friend, sister-in-law or coworker is incorrect or isn't knowledgeable, but it's always best to get information on such important subjects from professionals who are actually in the business.

Just keep doing what you're doing, Donita. Your credit intuition is on the mark.

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