The MOST IMPORTANT balance / limit ratio — maximizing your FICO scores through low REPORTED balances and few REPORTED credit cards with balances.

[This is a post from the CreditFactors knowledgebase]

The balance / limit ratio is one of THE most important FICO score factors.  It is calculated by adding all REPORTED limits for your REVOLVING accounts and all reported BALANCES and then dividing the balances by the limits.

Let’s say you have 2 credit cards with reported limits of $1,000 ($800 balance) and $1,000 (with $200 balance).

When the credit limit is not reported, FICO scoring formulas substitute with the reported “largest past balance” and you need to review the myFICO reports to determine what is used for each account on each report!

Divide the $1,000 combined balance by the $2,000 combined limit and you get a 50% B/L ratio, a HIGH ratio, severely lowering your FICO scores.

Maxed out accounts also lower scores, but it’s not as important as your combined ratio.    “Open” accounts such as AmEx cards that are to be paid if full every month are not usually included, look for REVOLVING accounts.

Compare your calculated ratio with the reported FICO score factor ratio — it should match.

The B/L ratio is so important, I’ve seen scores barely above 600 with NO derogs but large revolving debt and maxed out accounts.

MANIPULATING the B/L Ratio by paying credit cards EARLY and having only one account with a REPORTED balance.

1) Try to have only ONE credit card with a REPORTED balance.

If you use several cards, you can pay them BEFORE the statement date online and since they usually report the balance at the statement date, it’ll be $0 on the reports.

2) Keep the REPORTED balances on credit cards as low as possible.

From a post to a client:

Your TU 2nd NEGATIVE factor and 4th with Experian:

“You’ve made heavy use of your available revolving credit.
Ratio of your revolving balances to your credit limits 26%”

While listed as a POSITIVE factor on Equifax, the Equifax FICO score would definitely be HIGHER if the client owed LESS on the credit cards.

You may not owe a lot, but you still lose points for the 26% ratio.  The best ratio is 1%.

If you have NO reported credit card balances, you’ll LOSE FICO points for not using credit cards.

You can make a partial payment before the statement date and you’ll have the low balance reported.  Occasionally a creditor will update during the billing cycle if the balance increases a lot, but I rarely see that.

Make sure that one account always REPORTS a small balance. This does NOT mean that you have to pay interest.  You can pay the statement balance in full, just use the card again for a small purchase before the next statement date.

3) Try not to have REPORTED balances close to the limit

If you split up the balance on two cards and the 2nd card would otherwise be reported with a $0 balance, you may not gain anything.

4) Use all your credit cards once or twice a year.

Not only should this keep creditors from closing the accounts for non use, but FICO scoring software sometimes treats accounts that have not been used in a long time as closed.

5) Look for old accounts that APPEAR to be closed.

Many of my clients found that these (sometimes pre bk) department store accounts were still open and they got replacement cards within a few days.  Use the account, then pay it off in full AFTER a balance was reported once.  Often one phone call for a new card can get you 20 points and sometimes a lot more points if the account was very old.