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How is my FICO credit score calculated?

 

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Question:

How is my FICO credit score calculated?

Answer:

The exact formula is not know to me, nor to anyone whom I know. Credit cards and their debt to max ratio are very important.

Robert, a loan officer from Southern California says:
'Mortgage debt would not affect the FICO as dramatically as credit card (revolving debt) debt ratios do. The credit cards are 35% of your score! As long as your mortgage is in good standing then you should be fine, albeit all new credit will impact your score until it is seasoned at least six months.'


If you want to track the impact of individual actions I suggest signing up with Equifax and buying their 'ScoreWatch' product. I think I paid $6.95 / month for it when I bought it for a full year. (They bill me monthly.)

Here are some actions and how they impacted my credit score:

10/26/2006: 1 inquiry (for a mortgage) - no impact. Score 745


10/28/2006: maxxed out a credit card. Previous balance was $11k, 'parked' another $11k there. Card limit was $22,500 of which I used $22,000

10/28/2006: Credit score dropped 7 points, from 745 to 738


11/11/2006: Another mortgage inquiry

11/11/2006: Score rises from 738 to 742 (??? see below)


11/18/2006: Another credit card which I pay off every month reported $589 more than in the previous month. The card's limit is $15k, the previous month I had spend $2k on it, this month it was $2600, no big deal.
But it dropped my score by 13 points

11/18/2006: Credit score dropped 13 points from 742 to 729


12/06/2006: took about $30k out on a HELOC (Home Equity Line of Credit) as downpayment to buy another house.
I had not used this HELOC in over a year. The Credit Report Agency considers this a 'Dormant Card Activity Date of last activity more than 11 months.'
Yes, they view a HELOC as a Credit Card with a very high limit and low interest. This has some impact.
This HELOC was over $80k, so $30k was not a high utilitization. However, it cost me 16 points. Because it was 'activating a dormant account'.

12/06/2006: Credit Score drops from 729 to 713


12/09/2006: The new mortgage account is created, based on the second inquiry dated 11/11/2006. The new account lets my score go up.

12/09/2006: Credit Score rises from 713 to 746


A few weeks later I paid off that HELOC but no impact on my score. My Equifax score went back to 753, supposedly because I paid down one of my highly utilized credit cards.

So you see, inquiries count, using dormant accounts harm you, using credit cards close to their limit seems to count.

It also seems that they look on a card-by-card basis. For example, I have 5 cards with a total limit of over $100k, close to 200k if I include the HELOC. I pay off all cards every month, but I have 2 cards with a very low rate (1.99% for a year and 3.99% lifetime). I only make minimum payments on these cards and when I go them, put $35k on those 2 cards.

So overall, I owed less than $40k on cards with a total limit ~ $200k. This means less than 20% usage, right? Should be harmless. Apparantly not.
Most of the cards had a 0 balance and 2 had a 95% usage, so it did affect my score. I was well aware of it when I did that and I didn't care as my score was still good enough to get good mortgages. I used the cheap credit card money for real estate investments.

I suggest going to http://www.econsumer.equifax.com/ and investing $8.95 / month (that's what their web site says today). It's pretty interesting.

07/2007: I purchased 3 single-family residences within 6 weeks. No wait. This means 3 inquiries, and, as of today, 2 new accounts showing on my credit report. My Equifax score did not change because of the inquiries or the new accounts. My TransUnion score actually improved by 15 points in this period. But my Experian score dropped 45 points! The Experian score used to be the highest of the 3, now it is the lowest. All mortgages were traditional 30-year fixed, fully amortizing mortgages with a 25% down payment and 75% covered by the mortgage. Certainly no risky mortgages (each for itself). This shows you how different the algorithms of the 3 scores are.

Note:
On 11/11/2006 the score rose 4 points as a result of an inquiry. The truth is, the inquiry may have not counted at all.
Your score can change even if you do nothing at all and none of your parameters change.
The reason is that the score expresses how much of a risk you are compared to the average population.
If the average population increases their debt, is late on payments etc, then your score will go up even if you do nothing at all!


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