topic Re: How # of cards with balance can effect FICO score in Understanding FICO® Scoring

How # of cards with balance can effect FICO score

jello77 — Sat, 28 Jan 2012 10:18:37 GMT

When I read articles about credit scores, the author will sometimes say that "utilization" counts for 30% of your FICO score. This statement is based on the well-known pie chart that shows how much different factors effect your score.

But the category that accounts for 30% is NOT utilization, it's "Amounts owed." Utilization is just one of six factors included in the "Amounts owed" category, as explained on this FICO-sponsored page:

http://www.scoreinfo.org/FICO-Scores/Score-Ingredients.aspx

The "Amounts owed" category includes:

(1) How much of total credit line is being used on revolving accounts. (This is referred to as utilization).

(2) Amount owed on all accounts.

(3) Amount owed on different types of accounts.

(4) Whether you are showing a balance on certain types of accounts.

(5) How much is still owed on installment loan accounts, compared with the original loan amounts.

(6) Number of accounts with a balance (the more revolving accounts with a balance, the lower your score will be)

The last factor (number of accounts with a balance) is often overlooked by authors who write about credit scores. For example, I recently read an article recommending that if you have a high balance on one card, you can improve your score by spreading out the amount owed over several cards.

This advice is questionable on two grounds. First, although it would reduce utilization of the card with the initial high balance, it would not reduce your overall utilization. Second, any positive effect on your score from reducing utilization on the high balance card might be offset by the negative effect of having more cards with balances.

I have not seen much information (on this board or elsewhere) about how many points your score can change based on how many cards have a balance. So I did an experiment with my own cards. Over the past 6 months, I paid my cards before the statement date to keep the reported balance on each card at either 0 or $100 (less than 1% utilization on each card). No other changes to my credit report took place during this period (no new cards, no inquiries, etc.).

Here is how my Equifax FICO score was effected by changing the number of cards with a balance:

Cards with $100 balance_____EQ FICO score_____Effect on score

_______0_____________________807

_______1_____________________811_____________(+4)

_______2_____________________806_____________(-5)

_______3_____________________801_____________(-5)

_______4_____________________787_____________(-14)

_______5_____________________770_____________(-17)

Some frequent posters on this board have said that to optimize your FICO score, have only one card report a small balance.

My experiment supports this advice.

Re: How # of cards with balance can effect FICO score

whodatnation2 — Sat, 28 Jan 2012 10:17:26 GMT

Re: How # of cards with balance can effect FICO score

Mustanglvr2006 — Sat, 28 Jan 2012 12:13:48 GMT

jello77 wrote:
When I read articles about credit scores, the author will sometimes say that "utilization" counts for 30% of your FICO score. This statement is based on the well-known pie chart that shows how much different factors effect your score.

But the category that accounts for 30% is NOT utilization, it's "Amounts owed." Utilization is just one of six factors included in the "Amounts owed" category, as explained on this FICO-sponsored page:

http://www.scoreinfo.org/FICO-Scores/Score-Ingredients.aspx

The "Amounts owed" category includes:

(1) How much of total credit line is being used on revolving accounts. (This is referred to as utilization).

(2) Amount owed on all accounts.

(3) Amount owed on different types of accounts.

(4) Whether you are showing a balance on certain types of accounts.

(5) How much is still owed on installment loan accounts, compared with the original loan amounts.

(6) Number of accounts with a balance (the more revolving accounts with a balance, the lower your score will be)

The last factor (number of accounts with a balance) is often overlooked by authors who write about credit scores. For example, I recently read an article recommending that if you have a high balance on one card, you can improve your score by spreading out the amount owed over several cards.

This advice is questionable on two grounds. First, although it would reduce utilization of the card with the initial high balance, it would not reduce your overall utilization. Second, any positive effect on your score from reducing utilization on the high balance card might be offset by the negative effect of having more cards with balances.

I have not seen much information (on this board or elsewhere) about how many points your score can change based on how many cards have a balance. So I did an experiment with my own cards. Over the past 6 months, I paid my cards before the statement date to keep the reported balance on each card at either 0 or $100 (less than 1% utilization on each card). No other changes to my credit report took place during this period (no new cards, no inquiries, etc.).

Here is how my Equifax FICO score was effected by changing the number of cards with a balance:

Cards with $100 balance_____EQ FICO score_____Effect on score

_______0_____________________807

_______1_____________________811_____________(+4)

_______2_____________________806_____________(-5)

_______3_____________________801_____________(-5)

_______4_____________________787_____________(-14)

_______5_____________________770_____________(-17)

Some frequent posters on this board have said that to optimize your FICO score, have only one card report a small balance.

My experiment supports this advice.

Yes you are correct, Fico not only scores you on your overall revolving util, but you are also scored on having several accounts with balances, as you know by reading your chart.

The best results (scorewise) is to have only one CC reporting a balance of 1-9% util of it's CL, for some people, they will see their highest score with one CC reporting, say, @ 7% util, for me, Fico awards me with my highest EQ Fico when I have only 1 CC reporting my util between 1-5%, my score will not change, but if I let one CC report a balance with 9% util, my score will drop 4-5 points.

One month I let two CC's report a balance, one with $39 and the other with $75, I was still at 1% util, but my score dropped about 9 points, just because I had two CC's reporting that cycle, but the following month I went back to letting just one CC report a very small balance, my score went right back to exactly where it was.

Your chart is a super example of how Fico will score you, with just one CC reporting the $100 bal (which I would assume had you at 1% util) and then letting several CC's report $100 balances as well (again assuming your util was still in the 1-9% util range). Your chart is a perfect example of how Fico not only scores you on overall revolving util, but how you are scored on several accounts with balances.

Very good post jello, I think other Memers who read this will see the impact to Fico scoring based on letting just one CC report a small balance opposed to letting several cards reporting small balances.

I highlighted red a part of your post and I will also quote it below.

The last factor (number of accounts with a balance) is often overlooked by authors who write about credit scores. For example, I recently read an article recommending that if you have a high balance on one card, you can improve your score by spreading out the amount owed over several cards.

The part I underlined and bolded make no sense what so ever to me, as stated earlier in my reply, Fico not only scores you on overall util, but also scores you on "accounts with balances" so if you have one CC reporting a high balance, your util will be somewhat high (this all depends on your total overall revolving credit you have avail to you) but let's just say you have that one card reporting 1000 and your util is 23%, your score will be higher with just that one CC reporting the 1000 than if you had 6 CC's reporting a total of 1000, Fico likes it better scorewise with less accounts with balances, as opposed to having that 1000 spread out across several cards.

Very good post jello:smileyhappy:

Re: How # of cards with balance can effect FICO score

my-own-fico — Sat, 28 Jan 2012 12:53:51 GMT

I certainly agree that utilization alone doesn't equal "Amounts owed".

Nice table by the way. Assuming that you have five cards and that they all count in utilization, I'm surprised though that you weren't slammed with a major score decrease having a $100 balance on the third card. It's my experience that once you enter the second half of the cards, that's where you get hit the hardest. In your case, it was the fourth card.

Re: How # of cards with balance can effect FICO score

GregB — Sat, 28 Jan 2012 15:46:23 GMT

Based upon my experience, your conclusion is mostly correct.

However, I think the recommendation to spread a balance over more than one card could also be correct IF that card is maxed out (util >80%). There seems to be a penalty for most people according to number of accounts that are maxed out.

My own tracking of score change with number of accounts with balances has shown a bigger change when I pass 50% of accounts reporting balances. However, I have 24 accounts. When the 13th account reports a balance, I have about a 20 point drop. I saw little change from 13 to 14 to 15 to 16 and back to 13. I also saw small changes going from 12 to 11 to 10 to 9. I saw improvement going from 9 to 8 and again from 8 to 7. This became obvious when I just went from 7 back to 8 and saw the exact 14 points disappear that I had just gained.

Re: How # of cards with balance can effect FICO score

RobertEG — Sat, 28 Jan 2012 22:05:24 GMT

Nice post jello!

Its another example of how simplified advice on how to improve your score is often oversimplified, and thus misleading.

Taking your example of % revolving with balance, it is often stated that closing a CC wont have much score effect since its age still counts in your AAoA. True, but it will reduce the denominator in the % revolv with bal calculation, and could be a hidden impact, particularly for those with few CCs. One-category or sub-category impact often does not tell it all.

Re: How # of cards with balance can effect FICO score

my-own-fico — Sun, 29 Jan 2012 17:41:48 GMT

It's at a time like this that you wish Score Watch would send you a credit alert whenever a balance decrease takes place, as in the case of a balance increase. As I too now work my way up, most of it within a single score alert time frame, it occurred to me there's little opportunity to monitor the EQ FICO score ascent. Any suggestions?

Re: How # of cards with balance can effect FICO score

Booner72 — Sun, 29 Jan 2012 21:14:11 GMT

Thank you so much for taking the time to post your experiment's results. This is one of the most helpful posts I've seen in a while - I love to see actual point changes based on doing certain things.

@Robert - I never thought about how closing a card reduces the denominator of how many report a balance. Good point!

Re: How # of cards with balance can effect FICO score

NorCal1 — Wed, 14 Mar 2012 15:10:32 GMT

Hey, just saw this today. +1

Great info, and it supports what I have been perceiving and experiencing in recent months, as I track my scores and data weekly now.

Again, thank you for your effort and meaningful thread!!

Re: How # of cards with balance can effect FICO score

lovinlifeinkc — Wed, 14 Mar 2012 15:35:27 GMT

This is all such great information.

Just this morning I was debating on paying small balances (to zero) on 2 cards or applying that money to a card with a larger balance.

I opted for paying the balances to zero on 2 cards. Appears I made the best decision for my score.

The card with a larger balance (my baby, Discover Escape:smileytongue:) has a 6 month free finanacing offer.

Since Discover has yet to report to any of the credit agencies - I wonder how many points my score will drop (potentially) as a new card with a balance of around $500.

I am assuming they will report at statement end.

Does anyone know if Discover will report to all three agencies??

Re: How # of cards with balance can effect FICO score

Duke-of-Earl — Thu, 15 Mar 2012 05:55:10 GMT

Nicely done experiment and well written report! It supports what I've often seen stated on this forum, and also experienced myself in the past in a similar experiment: EQ in particular hates (or at least used to hate) all-zero balances. In my little experiment, done about two years ago, I alternated several times between total balances of $0 and $10 (on one card, didn't matter which), and got my EQ and TU FICO scores after each change. It was quite reliable: with the $10 balance total, I had 813 FICO scores on both EQ and TU; with zero balance, TU went up to 819, EQ down to 809. That was exactly what I had seen predicted here.

But recently, it seems to have changed. I prefer not to bother with the small residual balance unless I have some reason to maximize my score, so I've been at all zero for a number of months. I got an offer from FICO for reduced-rate scores, and I realized I hadn't actually pulled mine for some time, so I took the offer even though I hadn't had time to get the $10 residual in place. (Yeah, sucker for a bargain.) And I found just the opposite behavior as previously: EQ was higher (807) than TU (799). The lower scores than previously didn't surprise me;, since I recently took on a larger mortgage since the 813 etc. reported above. But I was surprised that TU seemed more sensitive to the zero balances than EQ. And the infamous "factors" text confirmed this: For TU, "Your FICO score was hurt because you are not currently demonstrating active revolving credit management.", while EQ thought I was good on that (and the other) criteria. So I'm wondering whether anyone else has noticed this sort of change.

By the way, these scores, just above and below 800, give an interesting view of how nonsensical the "Your risk to the lender" report can be. Supposedly, TU thinks I'm twice as likely to default (2%) than EQ does (1%). I know, it's all statistical, and there have to be boundaries, but such a proportionally enormous difference can't be realistic in an individual case.

Re: How # of cards with balance can effect FICO score

Duke-of-Earl — Thu, 15 Mar 2012 06:08:40 GMT

my-own-fico wrote:
It's at a time like this that you wish Score Watch would send you a credit alert whenever a balance decrease takes place, as in the case of a balance increase. As I too now work my way up, most of it within a single score alert time frame, it occurred to me there's little opportunity to monitor the EQ FICO score ascent. Any suggestions?

I don't use Score Watch, but you can get alerts for balance increases or decreases from Equifax Credit Watch. You can specify a balance change amount, or percentage, and it alerts regardless of the sign of the change. I've found it very useful in confirming just when my balance is reported (only when it changes, of course). One disclaimer: I'm not sure this product is available any more for new subscriptions.

Re: How # of cards with balance can effect FICO score

cashnocredit — Thu, 15 Mar 2012 06:27:41 GMT

Great post jello77. It matches quilte closely with my experience over the last year with a thin file and having from 2 to now 4 CCs and a OD LOC.

Re: How # of cards with balance can effect FICO score

pakman92 — Thu, 15 Mar 2012 11:10:35 GMT

great post and thank you, jello

Re: How # of cards with balance can effect FICO score

Crazy8s — Fri, 16 Mar 2012 00:27:38 GMT

So, is it better then to leave your small (<9%) balance on a CC that also reports the CL? E.g., rather than, say, a store card such as Macy's which does not show your CL? (otherwise, how will the CB know what your utilization percentage is.....)

Re: How # of cards with balance can effect FICO score

Rain77 — Tue, 20 Mar 2012 15:39:39 GMT

Great post! Will be going back over my payoff plan. My plan was to leave balances on a few cards, but I will just PIF what I can, and quickly do my best to get rid of the others.

Re: How # of cards with balance can effect FICO score

my-own-fico — Fri, 23 Mar 2012 11:28:51 GMT

Duke-of-Earl wrote:

For TU, "Your FICO score was hurt because you are not currently demonstrating active revolving credit management."

I wonder whether FICO will hit you just as hard for zero card balances if you have an installment account.

On another note, I take it your 823 is TU 04, not TU 98?

Re: How # of cards with balance can effect FICO score

marty56 — Fri, 23 Mar 2012 09:04:29 GMT

My experience is that TU hits your harder for # CCs reporting a balance then EQ does and EQ point loss for no CC balances is just a few points. I have a mortgage and auto loan if that helps.

Re: How # of cards with balance can effect FICO score

crunching_numbers — Fri, 23 Mar 2012 18:46:07 GMT

Duke-of-Earl wrote:
Nicely done experiment and well written report! It supports what I've often seen stated on this forum, and also experienced myself in the past in a similar experiment: EQ in particular hates (or at least used to hate) all-zero balances. In my little experiment, done about two years ago, I alternated several times between total balances of $0 and $10 (on one card, didn't matter which), and got my EQ and TU FICO scores after each change. It was quite reliable: with the $10 balance total, I had 813 FICO scores on both EQ and TU; with zero balance, TU went up to 819, EQ down to 809. That was exactly what I had seen predicted here.

But recently, it seems to have changed. I prefer not to bother with the small residual balance unless I have some reason to maximize my score, so I've been at all zero for a number of months. I got an offer from FICO for reduced-rate scores, and I realized I hadn't actually pulled mine for some time, so I took the offer even though I hadn't had time to get the $10 residual in place. (Yeah, sucker for a bargain.) And I found just the opposite behavior as previously: EQ was higher (807) than TU (799). The lower scores than previously didn't surprise me;, since I recently took on a larger mortgage since the 813 etc. reported above. But I was surprised that TU seemed more sensitive to the zero balances than EQ. And the infamous "factors" text confirmed this: For TU, "Your FICO score was hurt because you are not currently demonstrating active revolving credit management.", while EQ thought I was good on that (and the other) criteria. So I'm wondering whether anyone else has noticed this sort of change.

By the way, these scores, just above and below 800, give an interesting view of how nonsensical the "Your risk to the lender" report can be. Supposedly, TU thinks I'm twice as likely to default (2%) than EQ does (1%). I know, it's all statistical, and there have to be boundaries, but such a proportionally enormous difference can't be realistic in an individual case.

Wait, is the SIZE of my mortgage factored into my FICO??!!! I live where houses cost more. That does not seem fair.

Am I being penalized for doing a Re-fi? I refi'd with no cash out, so my mortage started over with 100% due, nothing paid off. Are you penalized for % paid/not paid too? I am not even underwater... again not fair.

It will be years until a new mortgage gets a good ratio. :smileyfrustrated:

Please tell me I am misunderstanding this tidbit of information.

Re: How # of cards with balance can effect FICO score

Lel — Fri, 23 Mar 2012 19:34:31 GMT

crunching_numbers wrote:

Wait, is the SIZE of my mortgage factored into my FICO??!!! I live where houses cost more. That does not seem fair.

Am I being penalized for doing a Re-fi? I refi'd with no cash out, so my mortage started over with 100% due, nothing paid off. Are you penalized for % paid/not paid too? I am not even underwater... again not fair.

It will be years until a new mortgage gets a good ratio. :smileyfrustrated:

Please tell me I am misunderstanding this tidbit of information.

Installment loan balances have a very small effect on FICO score, if any. I, too, live in an area in which basically everyone has jumbo loans, so I would be annoyed if this had a major effect on scores. It doesn't.

The primary negative FICO pressure of a refinance is not that you've reset the loan to "100%" utilization, but rather because there's a new account reporting, a new inquiry associated with the loan application, and a possible effect on average account age. However, in my experience the effect is temporary. When I refinanced a home equity loan, there was a small drop in my FICO scores, but within a few weeks it was back where it had been for a while. As I have paid down my loans, there really hasn't been any effect on FICO scores. My credit card balances are what drive the small fluctuations in score.