Automated credit score advice may not fit

Free online tips can conflict, especially if your score is high already


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Question for the expert

Dear Speaking of Credit,
I keep on top of my credit, so I was happy to see more of my credit cards give some type of free credit score, and free advice on how to improve my credit. But now I have to question whether it's accurate information. I was just checking my credit score on USAA and clicked on what they said was hurting my scores and this was one reason: "The largest credit limit among all the open bank card or revolving accounts in your credit file is low. Having higher limits gives you access to credit without seeking new loans or becoming overextended -- which are triggers for higher risk."

I have a credit score in the 800s, at least two cards with credit limits more than $20,000, and while I use my cards routinely to earn rewards, I always pay them off monthly. I thought that credit limits didn't come into play unless you used them, but this advice is saying high credit limits by themselves improve credit scores. So I don't think the credit-improvement advice they're giving is accurate. Do you agree? Do high credit limits, by themselves, improve credit scores? -- Julie

Answer for the expert

Dear Julie,
First, let's start by noting that the score and explanation you received appears to have come from the VantageScore credit scoring formula used by USAA and many other consumer websites. The source of this automated information is noteworthy here because your situation provides an example of how different credit scoring models can not only produce different scores, but different -- and often conflicting -- pieces of score-raising advice.

There are two major credit scoring companies in the U.S.: FICO and VantageScore. FICO has occupied more than 90 percent of the scoring market for decades, while the relative-newcomer, VantageScore, has been steadily gaining a little of that ground. Both scoring systems use a range of 300 to 850, with higher scores indicating lower future credit risk. And each score relies entirely on information obtained from credit bureau files found at Equifax, Experian and TransUnion.

The advice you received along with your VantageScore appears to be saying that your score could be higher with a greater-than-$20,000 credit limit, because having a higher limit will enable you to be viewed as less of a credit risk by a prospective lender. And while both the VantageScore and FICO formulas evaluate credit card balance-to-limit (utilization) ratios and other factors that include available credit, only VantageScore considers the size of your largest credit limit in and of itself.

What are reason codes?
To put this explanation and advice in proper perspective we'll need to understand something about reason codes. Whether calculated by VantageScore or FICO, reason codes (also known as score factors and adverse action codes) tell you why your score was not higher by pointing out the specific factors in which the biggest gaps occurred between the number of points possible and points earned.

When accompanying a credit score, reason code information is commonly used as explanation within "score-hurting" categories by listing up to four of the scoring calculations having the most negative effect on the score, in descending order from higher to lower impacting.

What do reason codes tell you?
Perhaps the most valuable lesson to learn from reason codes is that they tend to be very useful when applied to scores in the lower ranges (below 700), somewhat useful in the mid-to-high ranges (700 to 750), and relatively useless for high scores (above 750), such as yours.

To explain, since a low-to-middle score typically reflects some late payments and/or high credit card utilization, recommendations to pay on time and reduce card balances will always be on target, since taking one or both of these actions is sure to help your score sooner or later.

For a high scorer such as yourself, who, by definition, is already paying on time and keeping credit card balances down, the reason codes you're seeing are more likely to reflect the scoring formula's attempts to distinguish between degrees of already-very-low risk than provide the kind of actionable advice that would accompany a lower score.

Therefore, don't take any of the explanations and advice that accompany a very high score too seriously.

To directly answer your questions:

1. Do I think the credit-improvement advice they're giving is accurate? Accurate, yes. Helpful, not really. Considering how reason codes are derived within the VantageScore formula and that the advice you've been given about your score comes from these reason codes, when taken literally, the information you received is no doubt accurate. That is, if they say your highest credit limit is too low to achieve the maximum points possible for that "largest credit limit" factor, then that's just how it is. Where I question the value of this advice is that for even the lowest-risk consumer, obtaining a card with a limit higher than $20,000 seems neither readily attainable nor necessary.

2. Do high credit limits, by themselves, improve credit scores? Assuming it's not just some robotic glitch, then apparently so, if your credit report is being scored by the VantageScore formula. By how many points and how high a limit you would need, there's no way to know, as both VantageScore and FICO consider such details proprietary. However, we can infer from the explanation you received that at least some additional points could be earned with a sufficiently higher limit. So, if you're offered a card with a limit higher than $20,000 you just might want to accept it. But keep in mind that even if you do, your VantageScore may benefit, while the score most likely to be used the next time you apply for credit, FICO, won't.

See related: List of cards providing free credit cards grows

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Published: January 21, 2016

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Updated: 10-24-2016

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