Impacts to Credit FICO® Scores

  1. Credit Card Impacts to FICO® Scores
  2. Mortgage Impacts to FICO® Scores
  3. Student Loan Impacts to FICO® Scores
  4. General Impacts to FICO® Scores

Credit Card Impacts to FICO® Scores

Should I take advantage of promotional credit card offers?

Generally, opening new accounts can indicate increased risk and can hurt your FICO® Scores. Every individual’s situation is unique, but in general consumers with a moderate number of revolving accounts on their credit reports generally represent lower risk than consumers with either a relatively large number or a very limited number of revolving accounts. However, please keep in mind that opening a new account, and to a lesser extent the resulting credit inquiry, may demonstrate higher risk in the short term.

Will closing a credit card account impact a FICO® Score?

Yes, but not in the way you might expect. And, while closing an account may be a good strategy for responsible financial health management in some cases, it also may have a negative impact on your FICO® Scores.

FICO® Scores take into consideration something called a “credit utilization ratio”. This ratio or proportion basically looks at your total used credit in relation to your total available credit; the higher this ratio is, the more it can negatively affect your FICO® Scores. This is because, in general, people with higher credit utilization ratios are more likely to default on loans. So, by closing an old or unused card, you are essentially wiping away some of your available credit and thereby increasing your credit utilization ratio.

It’s a bit tricky, so here’s an example:

Say you have three credit cards.

  • Credit card 1 has a $500 balance and a $2,000 credit limit.
  • Credit card 2 is an unused card with a zero balance and a $3,000 limit.
  • Credit card 3 has a $1,500 balance and a $1,500 limit.

In this scenario your credit utilization ratio looks like this:
Total balances = $2,000 ($500 + $0 + $1,500)
Total available credit = $6,500 ($2,000 + $3,000 + $1,500)
Credit utilization ratio = 30% (2,000 divided by 6,500)
Now, if you decide to close credit card 2 because it’s an old card that you never use, your credit utilization ratio looks like this:
Total balances = $2,000 ($500 + $1,500)
Total available credit = $3,500 ($2,000 + $1,500)
Credit utilization ratio = 57% (2,000 divided by 3,500)
You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card.

What’s the best way to manage my growing credit card debt?

 

There are a number of different things to consider when managing credit card debt. We’ll touch on a few of the key things of which to be aware.

The advantage of having more than one credit card

People who only have one credit card available and are coming close to maxing out that card, might consider applying for another card in terms of how it affects their FICO® Scores. It has to do with what’s called credit utilization.

Utilization measures how much of your credit you are using in relation to your total available credit. If you have one credit card with $500 charged to it and a credit limit of $1,000, then your utilization is 50%. There’s no ideal utilization to shoot for, because as with most things, it depends on everything else on your file. But in terms of the risk of hurting FICO® Scores, people who keep their utilization on any one card below 50% will see less negative impact to their FICO® Scores. Research has shown that people who max out a single credit card are more likely to miss future payments, and therefore FICO® Scores consider people using more of their available credit as more risky than people who are using very little of their available credit.

Disadvantages of having a large number of credit cards

Consumers with a moderate number of revolving accounts on their credit report generally represent lower risk than consumers with either a relatively large number or a very limited number of revolving accounts.

FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.

Redwood Credit Union and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Redwood Credit Union and Fair Isaac do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating.

FICO® Score and associated educational content are provided solely for your own non-commercial personal review, use and benefit.

Mortgage Impacts to FICO® Scores

Are the alternatives to foreclosure any better as far as FICO® Scores are concerned?

The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure, are all “not paid as agreed” accounts, and considered the same by FICO® Scores. This is not to say that these may not be better options in some situations; it’s just that they will be considered no better or worse than a foreclosure by FICO® Scores.

Bankruptcies as an alternative to foreclosure may have a greater impact on a FICO® Score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO® Scores.

How does a mortgage modification affect the borrower’s FICO® Score?

FICO® Scores are calculated from the information in consumer credit files. Whether a loan modification affects the borrower’s FICO® Scores depends on whether and how the lender reports the event to the consumer reporting agencies, as well as on the person’s overall credit profile. If a lender indicates to a consumer reporting agency that the consumer has not made payments on a mortgage as originally agreed, that information in the consumer’s credit reports could cause the consumer’s FICO® Scores to decrease or it could have little to no impact on his or her FICO® Scores.

Will contacting my mortgage servicer affect a FICO® Score?

Simply contacting your servicer with questions has no effect on your FICO® Scores. If your servicer needs to check your credit, they must get your permission first. A credit check could result in an inquiry in your credit file, which can have a small impact on your scores.

Any action after that may also impact your FICO® Scores—for example, if you pursue refinancing or loan modifications.

How does refinancing affect a FICO® Score?

Refinancing and loan modifications can affect your FICO® Scores in a few areas. How much these affect the score depends on whether it’s reported to the consumer reporting agencies as the same loan with changes or as an entirely new loan.

If a refinanced loan or modified loan is reported as the same loan with changes, three pieces of information associated with the loan modification may affect your score: the credit inquiry, changes to the loan balance, and changes to the terms of that loan. Overall, the impact of these changes on your FICO® Scores should be minimal.

If a refinanced loan or modified loan is reported as a “new” loan, your score could still be affected by the inquiry, balance, and terms of the loan—along with the additional impact of a new “open date.” A new or recent open date typically indicates that it is a new credit obligation and, as a result, can impact the score more than if the terms of the existing loan are simply changed.

How do loan modifications affect a FICO® Score?

Your servicer will likely use a FICO® Score, along with other factors, to help determine the new terms of your loan, such as your mortgage rate. In general, your FICO® Scores play a key role any time you apply for new credit or change the terms of a loan. That’s why staying credit savvy and maintaining a good credit rating remains so important.

How long will a foreclosure affect a FICO® Score?

A foreclosure remains in your credit files for seven years, but its impact to your FICO® Scores will lessen over time. While a foreclosure is considered a very negative event by FICO® Scores, it’s a common misconception that it will ruin your scores for a very long time. In fact, if all other credit obligations remain in good standing, your FICO® Scores can begin to rebound in as little as two years. The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO® Scores than if you had a foreclosure in addition to defaulting on other credit obligations.

FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.

Redwood Credit Union and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Redwood Credit Union and Fair Isaac do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating.

FICO® Score and associated educational content are provided solely for your own non-commercial personal review, use and benefit.

Student Loan Impacts to FICO® Scores

How do FICO® Scores consider student loan shopping?

The growth of the student loan industry has increased public interest in how lenders assess the credit risk of young college-bound adults. Both large and small lenders often use FICO® Scores to help them underwrite student loans. How FICO credit scoring formulas treat credit inquiries depends on the way in which those inquiries are reported by lenders to each of the three consumer reporting agencies. If the inquiries are reported by the lender in a manner that indicates rate shopping for a single loan (such as a mortgage, auto, or student loan), FICO scoring formulas typically reflect that in its calculation of a score. In general, student loan shopping inquiries made during a focused time period will have little to no impact on a score. In the rare instance in which a credit inquiry related to a student loan is not coded so that it receives our special rate-shopping inquiry logic, that inquiry typically would decrease a FICO® Score by only a few points.

What’s the best advice for people shopping for student loans to minimize the impact to their FICO® Scores?

As you’re shopping for the best student loan rate, the lenders you approach may request your credit reports or your FICO® Score (from one or more of the three consumer reporting agencies) to check your credit standing. Inquiries generally won’t affect a score if rate shopping is finished in a reasonable amount of time, which is made easier by researching rates ahead of time and deciding from which companies to get quotes. It’s advantageous for consumers to finish rate shopping and finalize a loan within 45 days. Not only will loan rates be easier to compare when the quotes come only a few days apart, but any impacts to a FICO® Score will be minimized.

FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.

Redwood Credit Union and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Redwood Credit Union and Fair Isaac do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating.

FICO® Score and associated educational content are provided solely for your own non-commercial personal review, use and benefit.

General Impacts to FICO® Scores

What are inquiries and how do they affect FICO® Scores?

Credit inquiries are requests by a “legitimate business” to check your credit.

Inquiries may or may not affect FICO® Scores. Credit inquiries are classified as either “hard inquiries” or “soft inquiries”—only hard inquiries have an effect on FICO® Scores.

Soft inquiries are all credit inquiries where your credit is NOT being reviewed by a prospective lender. FICO® Scores do not take into account any involuntary (soft) inquiries made by businesses with which you did not apply for credit, inquiries from employers, or your own requests to see your credit file. Soft inquiries also include inquiries from businesses checking your credit to offer you goods or services (such as promotional offers by credit card companies) and credit checks from businesses with which you already have a credit account. If you are receiving FICO® Scores for free from a business with which you already have a credit account, there is no additional inquiry made on your credit report.

FICO® Scores take into account only voluntary (hard) inquiries that result from your application for credit. Hard inquiries include credit checks when you’ve applied for an auto loan, mortgage, credit card or other types of loans. Each of these types of credit checks count as a single inquiry. One exception occurs when you are “rate shopping”. Your FICO® Scores consider all inquiries within a reasonable shopping period for an auto, student loan or mortgage as a single inquiry.

The relative information with a hard inquiry that can be factored into FICO® Scores include:

  • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
  • Number of recent credit inquiries.
  • Time since recent account opening(s), by type of account.
  • Time since credit inquiry(ies).

For many people, one additional hard credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO® Scores at all. For others, one additional inquiry would take less than 5 points off a FICO® Score.

Inquiries can have a greater impact, however, if you have few accounts or a short credit history.

Does applying for many new credit accounts hurt FICO® Scores more than applying for just a single new account?

The short answer is yes—applying for many new accounts often hurts your FICO® Scores more than applying for a single new account. There is no magic number of applications to which you should limit yourself. However, FICO® Scores consider recent inquiries less as time passes, provided no new inquiries are added.

Applying for a single new credit card may have a small impact to a FICO® Score, but if you apply for several credit cards, that can have a much greater effect on your FICO® Scores. Generally, rate shopping for home or auto loans will have less of an impact on your FICO® Scores than comparison shopping for credit cards or other types of credit accounts. A better practice when determining the best credit card is to read about the features of each card and then only apply for the one that has the features you want from your new card.

Is there a best way to go about applying for new credit to minimize the effect to a FICO® Score?

 

Applying for new credit only accounts for about 10% of a FICO® Score, so the impact is relatively modest. Exactly how much applying for new credit affects your score depends on your overall credit profile and what else is already in your credit reports. For example, applying for new credit can have a greater impact on your FICO® Scores if you only have a few accounts or a short credit history.

That said, there are definitely a few things to be aware of depending on the type of credit you are applying for. When you apply for credit, a credit check or “inquiry” can be requested to check your credit standing. Let’s take a look at the common inquiries you might find in your credit reports.

Credit Cards

If you only need a small amount, credit card companies will sometimes provide an increased credit limit (for accounts already opened). While a request for an increased limit may count as an inquiry just like opening a new card would, it won’t reduce the average age of your credit accounts, which is also important to your FICO® Scores.

If getting the limit raised on an existing card isn’t an option, then applying for the fewest number of credit cards will have the least negative impact to your FICO® Scores. For example, if a person needed an extra $5,000, getting one card with a $5,000 limit rather than two cards each with a $2,500 limit results in less impact to your scores. That’s because when applying for new credit cards, each application is counted separately as an individual inquiry in your credit file, and the more inquiries you have, the more that could hurt your FICO® Scores. Having more inquiries makes you look more risky to potential lenders.

Home, Auto, and Student Loans

FICO® Scores do not penalize people for rate shopping for a home, car or student loan. During rate shopping, multiple lenders may request your credit reports to check your credit. But FICO® Scores de-duplicate these and consider inquiries within a reasonable shopping period for an auto, student loan or mortgage each as a single inquiry. Doing the entire rate shopping and getting the loan within 45 days, will have no immediate impact to your FICO® Score.

Given rate shopping for home, auto and student loans has no immediate impact, why do you even see an inquiry in your credit files? While these types of inquiries may appear in your files, FICO® Scores count all those inquiries that fall in a typical shopping period as just one inquiry. So, again, doing rate shopping within a matter of weeks as opposed to a matter of months limits the longer-term impact to your scores as well.

Do employers use FICO® Scores in hiring decisions?

 

No.  While Federal law allows review of credit reports for the purpose of employment screening, FICO® Scores are not included with the reports.

Are FICO® Scores used in insurance underwriting?

 

FICO® Scores were designed to help lenders by rank-ordering consumers according to the likelihood they will become at least 90 days late repaying a creditor within the next 24 months. FICO® also offers FICO® Insurance Scores, credit-based insurance scores specifically designed for the insurance industry to help predict future auto and home insurance losses.

Are FICO® Scores unfair to minorities?

 

No. FICO® Scores do not consider your gender, race, nationality or marital status. In fact, the Equal Credit Opportunity Act prohibits lenders from considering this type of information when issuing credit. Independent research has shown that FICO® Scores are not unfair to minorities or people with little credit history. FICO® Scores have proven to be an accurate and consistent measure of repayment risk. In other words, at a given FICO® Score, non-minority and minority applicants are equally likely to pay as agreed.

How are FICO® Scores calculated for married couples?

Married couples don’t have joint FICO® Scores, they each have individual scores. The difference is that when you are single you usually only need to worry about your credit habits and credit profile. However, when you become married your spouse’s credit habits and credit profile may have an impact on yours. For example, if you have a credit card in both of your names and it doesn’t get paid on time, that can affect both of your FICO® Scores—and not in a good way.

Will spending less and saving more impact a FICO® Score?

While putting more money towards savings is usually a good idea, it’s not necessarily going to impact your FICO® Scores. FICO® Scores do not consider the amount of disposable cash (savings accounts, certificates of deposit or cash in your cookie jar) you have at any given time. Therefore, the amount of money you keep in savings doesn’t impact your FICO® Scores.

As far as spending less, that could have an effect on your FICO® Scores. For example, if you typically use your credit cards for purchases and you don’t always pay off the balance on those credit cards, then you may notice an impact in your FICO® Scores. FICO® Scores factor in the balance on revolving credit accounts (for example, credit cards).

If lenders have different lending requirements, how can I know if I qualify for affordable financing?

The surest way to get the most up-to-date and accurate information is to contact your lender for their FICO® Score requirements before shopping for credit. You can also check your current FICO® Scores so you’ll know where you stand in the eyes of these potential lenders.

Can accounts that aren’t in my credit reports affect a FICO® Score?

Though your FICO® Scores capture a pretty accurate picture of your credit history, not every account is recorded. Your good history of rental and utilities payments may not be listed in your credit reports. Even though your landlord, the cable and cell phone providers are pleased with your timely payments, this positive information may not be reported to the consumer reporting agencies. That being said, not paying these bills on time can have a negative effect on your financial health and your FICO® Scores:

  • Reported delinquencies:
    Even though your good payment history isn’t reported, if you go late on these bills, your landlord or utility department has the right to report your bills as delinquent to the consumer reporting agencies. If the bill continues to go unpaid, a judgment could be obtained against you in small claims court, and/or your account could be turned over to a collection agency. Any of these blemishes can then show up in your credit reports and can be as harmful to your FICO® Scores as the more commonly reported items such as late payments on loans or credit cards.
  • Future referrals:
    The next time you need to move, your potential landlord is likely going to require a copy of your credit report and a FICO® Score. In addition, he/she may want to contact your current landlord to check if you paid your rent on time. Even if you have a high FICO® Score, a potential landlord could choose another candidate if your current landlord reports that the rent is paid late or incomplete. As always, people who consistently pay their bills on time appear to be less risky to lenders and other types of creditors.

FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.

Redwood Credit Union and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Redwood Credit Union and Fair Isaac do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history or credit rating.

FICO® Score and associated educational content are provided solely for your own non-commercial personal review, use and benefit.