Can you explain these comments on my credit rating?

November 14, 2013 1:29 PM

I have a fairly good FICO rating, but according to the report, these two factors are negatively impacting my rating. Can you explain these to me and--more importantly--offer some advice on how I can improve them? 1. Proportion of loan balances to loan amounts is too high. 2. Length of time revolving accounts have been established.
posted by jackypaper to Work & Money (9 answers total)

1. Refers to how much available credit is being used. If you're nearly maxed out on your cards, you'll see this.

2. Means your credit accounts haven't been open all that long.

So, pay down your credit cards and keep them around for awhile and both of those notes go away.
posted by Ruthless Bunny at 1:30 PM on November 14, 2013

One significant factor in your rating is what is called your "credit utilization" which is a factor of how much credit you have available compared to used. In general, if you have significant amounts of unused credit, it suggests you are a better credit risk. Therefore, the way to improve the first one would be to pay down any balances you carry or to obtain more credit cards which would increase your unused credit.

There is no way to improve the length of credit history without the passage of time, I'm afraid. Adding more credit to improve #1 might reduce your score in #2, at least temporarily.
posted by Lame_username at 1:32 PM on November 14, 2013

The other way you get a "length of time" hit like this is if you are moving a large balance from one card to the other with a balance transfer offer, then closing the previous card. The advice is usually to not close the older card if you don't have to.
posted by JoeZydeco at 1:34 PM on November 14, 2013 [1 favorite]

It's worth noting, though, that most credit reports have to have SOME criticism on it, as a lesson in what to work on to improve your score. So, grain of salt. Those are the things that may be "less perfect" than other things on your report.
posted by rabbitrabbit at 1:35 PM on November 14, 2013 [2 favorites]

(In other words, even if your credit utilization is 9% and your length of history is 19 years, that may be the things the report will pick on because it can't argue with anything else, if your credit is really good.)
posted by rabbitrabbit at 1:37 PM on November 14, 2013

Just fyi, I pull credit reports regularly in my job financing home builders, and I literally cannot remember one that didn't have various criticisms at the top, even for borrowers with nearly perfect scores.
posted by skycrashesdown at 2:31 PM on November 14, 2013 [3 favorites]

Do you have an American Express card? Here is how it was explained to me.

Normal credit cards have a limit. If you're using 1,000 dollars of your 25,000 dollar limit then that looks quite low as a ratio. If you have an old style Amex, you don't have a limit and the same 1,000 bucks will negatively hit your ratio since you're using 100% of the amount of the card. I've never been able to verify this and I've thought about it a few times. I'd love it if someone could link to some evidence that it's either correct or incorrect.

If you can't figure out why you're getting dinged for utilization, perhaps its an Amex thing.
posted by 26.2 at 3:20 PM on November 14, 2013

FICO (Fair, Issacs - the people who actually make the models that calculate your credit score) have a credit reporting services that includes your credit score. (Others due to, but according to my research, this is the only one that is more or less reliable) They also have a feature that lets you calculate how changing your profile might change your score. You can sign up for a 30 day free trial to check out this feature for yourself (but only recommended if you know you will cancel it before you start getting billed!)
posted by metahawk at 9:44 PM on November 14, 2013

Best answer: Here's how I would break it down.

Banks want to know three things. First, how much do other banks trust this person to make their payments? Second, will this person be a "sweet spot" borrower... as in someone who borrows enough to incur interest, but who dependably pays that interest off? Third, is this someone who is going to try to game the system, or will they play by our rules?

Banks will give the best loans and lowest interest rates to someone who hits the spot in all three categories. They'll also give pretty good interest rates to someone who is trustworthy and who plays by the rules, even if that person keeps a zero balance (in the hopes that you'll run a balance at some point).

To explain why it matters to banks that you have a low debt to credit ratio and a long history for each credit card, here are some "bad borrower" habits.

• Borrow up to your limits. When banks see someone who seems to be running up to their limits, they see someone who is a lot more likely to run into financial disaster and stop paying them back.
• Run a high ratio of balance to total available credit. Again, you will seem like someone who is likely to run into financial ruin, and you seem like someone that other banks must not be trusting all that much... or they'd be giving you higher limits, and you'd have more credit available.
• Close credit cards as soon as 0% APR offers run out, and go open new ones because they have 0% APR offers. Banks will see you as someone who wants to game the system so they never pay interest. It's like a casino who sees someone counting cards... sorry buddy, get the hell out of here. The house always wins, and this is why banks don't like it if you don't have a long history with each card you have.
• Constantly use balance transfers to swap over debt to new cards with a lower (or 0%) APR. Again, banks see this and see someone who they can't make money off of easily. And again, this is someone who is trying to "beat the house," and the house then recognizes this and says nope... you get a crappier score, and worse offers next time around.
• Miss payments. This is a pretty obvious red flag.

So in summary, what you need to do is exactly what ruthless bunny says up top. Keep your cards around for as long as possible... even after introductory offers expire. Now you can see why banks care about that. And, make every payment, while paying down your debts so that you look like a dependable borrower who is not likely to run into financial problems any time soon. Then, your scores will keep on rising.
posted by Old Man McKay at 10:15 PM on November 14, 2013 [2 favorites]