Reduced Income = Lower FICO’s? No.

myths highway sign

FACT: This headline is a myth. To be clear, it is wrong. There is no basis in fact.

FACT: Income has nothing to do with your credit scores. I have worked with folks making over $850,000 per year who’ve had really low scores and with folks making less than $20,000 per year with fantastic scores. Income has nothing to do with your credit scores.

FACT: Paying bills on time has everything to do with good credit whether the income is a million or more a year or a thousand dollars a month.

FACT: A significant key to good credit scores is the proper usage of unsecured credit – credit cards in particular. The more of the available credit in use the lower the credit score will be. Optimal credit usage is 10% of the available credit. Maximum credit usage is up to 30% of the available credit to maintain good credit scores.

Example 1: On available credit – let’s say you have four bank credit cards with a total combined credit line of $50,000. If you have only up to $5,000 in use, you likely have an optimal credit score, providing all other credit accounts are timely paid. If you have $15,000 or more in use, your scores will be acceptable, but they will not be the highest possible as you are deemed to be using more credit than is wise per the FICO 08 algorithm.

Example 2: On available credit – let’s say you have two bank credit cards with a total combined credit limit of $3,000. If you have $300 in use, you likely have optimal credit scores providing you are utilizing each credit card on and acceptable basis. If you have $900 in use, your scores will not be optimal but they will be acceptable in most circumstances. This is entirely dependent on the totality of the credit history. On the usage of unsecured credit, it’s a simple matter of use it or lose it. Use your unsecured cards at least every other month or so. Pay the balance the following month or carry a minimum balance and pay the minimum payment. Again, it is a matter of using the credit or losing the credit. A word of caution, think long and hard before closing a long established credit card. Do not do such in haste or anger as it may do you more long term harm than good. Remember, the longer you have an account established the better this reflects on your credit.

As always do not hesitate to write back with comments or questions. I read everything that comes back, even though I don’t always get a chance to respond as quickly as I would like.

 

Art Credit: Google Images

Financially SpeakingJames Spray CCMB, CNE, FICO Pro | CO LMO 100008715 / NMLS 257365 | February 26, 2011
 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

 

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