Credit mix and maxing out: Undoing damage from a heavily used card
Let's Talk Credit
Dear Let's Talk Credit,
Hello, I have several questions and concerns that I hope you don't mind
answering. First, do retail credit cards differ from bank-issued cards as far as credit scores are concerned? Second, I have three
credit cards: two bank cards and one retail card. Monthly, my credit
utilization ratio for my first bank card is 9 percent and my second bank card
is really low at 1 to 2 percent. However, I have been maxing out or close to
maxing out my retail card to finance large purchases. I've been using the card
because they have 18-month, no-interest financing. I understand how credit
utilization can greatly affect my credit score, but with my two other cards in
very low credit utilization and my other retail card with a very high
utilization, how bad is it hurting my score? Third, how important is it to have
a variety of credit accounts included in your history? As stated earlier, I
have two revolving credit cards and one retail credit card. I'm asking because I'm
thinking about applying for an unsecured loan to add variety to my credit
history and to help further improve my score.
Last, I've been told that damaged
scores from a highly utilized card, such as my retail card, isn't permanent
damage. I've been told that after I pay off the debt, the next month my credit
is reported as paid off and it should bounce right back up. Is that true? -- Vu
You certainly have done your homework! These are great
questions. I am happy to answer them for you. Let's take them in order.
Your bank-issued cards and your retail card are
both revolving credit accounts. When scoring the contents of your credit report, the accounts will be viewed basically the same. You may earn slightly
lower points in your FICO score if you don't have a bank-issued card and only
have a retail card.
2. The credit utilization ratio that is factored into your FICO
score looks at both the ratio of your individual accounts and your total
utilization ratio for all your accounts. If your one retail card is the only
account that is over the ideal ratio (less than 30 percent), then your credit
score is likely not suffering a great deal.
3. FICO considers the different types of credit
accounts included in your credit report as 10 percent of your total credit
score. So, the fact that you do not have any installment accounts such as a car
loan or mortgage could be keeping you from reaching your maximum score. If the
unsecured loan that you are considering is an installment loan, where you make
the same payment amount each month for a specified period of time, it would
help to boost your score. This is provided that you make payments on time and as agreed each
4. Your information is correct that your credit
score will rebound once your retail account is paid off and even if it is paid
down to a more reasonable utilization ratio.
I think it is wonderful that you are concerned about your
credit score and keeping your score at its maximum level. Keep your credit
obligations to what you can afford each month, continue to make all payments on
time and as agreed and your credit history will remain very good.
See related: Rules for improving your credit mix, FICO's 5 factors for calculating credit scores
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Published: September 26, 2013