Expert Q&A

More than retail cards needed for an excellent FICO score


Retail credit cards, if used responsibly, can earn the cardholder a good — but not great — credit score. To take your score higher, you’ll need a mix of cards

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Question for the expert

Dear Credit Score Report,
I have only two credit cards: Target and JCPenney. Originally, they each only had a $500 credit limit. They both keep increasing my credit limit. I think both are now $1,500. I owe less than $350 on each. My own bank turned me down for Visa for overdraft protection. One thing they cited is lack of a “major” credit card. Should I leave those two cards at the increased balance or ask that it be reduced? My FICO score is only about 630. Been trying to work on it. Is it important to have a “major” credit card? Thank you. — Dorothy


Answer from the expert

Hey Dorothy,
You can certainly earn a good credit score with retail credit cards alone, but to achieve an excellent FICO score, you’ll need more.

According to FICO, “while a good score can result from retail card usage only, a better score can often be achieved when one or more major/national credit cards are included in the credit mix,” Barry Paperno, consumer operations manager for, says in an e-mail.

In other words, if your wallet contains only retail cards — such as plastic issued by department stores or gas stations — it can hold your credit score back. That’s largely due to the way credit scores are calculated. FICO says that because its research has found major or national credit card use to be slightly more predictive of a borrower’s behavior than retail card usage, “the FICO scoring formula tends to give greater importance to major/national credit card usage, particularly when evaluating amounts owed by consumers,” Paperno says.

Those debt amounts are significant to FICO. Among the components of FICO’s scoring model, the “amounts owed” category accounts for 30 percent of your score. In that category, the scoring model weighs your debt levels relative to your credit limits — a comparison known as your utilization ratio. Those utilization ratios tend to be higher for retail cardholders. With retailer-issued plastic, “most of these cards start consumers out with low limits that can negatively impact credit utilization levels, because many consumers then charge close to their limits right out of the gate,” says Steven Katz, spokesman for credit bureau TransUnion. As an example, let’s say you charged $400 on a retail card with a $500 limit, giving you an 80 percent utilization ratio and putting you close to maxing out your credit card. That would make you appear risky to lenders and also hurt your FICO score.

The problem can be compounded by retail cards’ borrowing costs. They typically have higher annual percentage rates (APRs) than other types of cards, meaning that making “only minimum payments due on retail/store cards can quickly build up high levels of debt,” Katz says. (A survey of retail cards found half were charging higher APRs this summer than in 2009.)

Since low utilization ratios are important for a good credit score, you definitely should NOT have your credit limits reduced. Instead, focus on eliminating your remaining debt with regular, on-time payments to your card issuers. “Keeping the balances low and always paying the bill on time for retail credit accounts will help build a positive credit history in the same way it does with any other account,” says Rod Griffin, director of public education for credit bureau Experian.

Here are a few other recommendations:

  • Check your credit reports. If your bank turned you down for that Visa card, you are entitled to a free credit report. Look that credit report over for any items that don’t look right — such as credit cards or other accounts that aren’t yours — and take steps to get these errors corrected. Fixing these mistakes can help improve your credit score.
  • Consider opening new accounts. When your FICO score begins to improve, you’ll be able to qualify for major credit cards. You may want to apply for credit cards that offer low interest rates, if you plan to carry a balance. As we’ve discussed, responsible use of these major credit cards should further benefit your FICO score.
  • Don’t open too many cards. Be aware that opening too many credit cards too quickly can actually hurt your credit score. As I’ve told readers previously, a hard inquiry — which happens when a borrower applies for new credit — can shave several points off a FICO score. While that may not sound like much, remember that impact is multiplied with each new inquiry.
  • Consider getting an installment loan. A mix of different types of credit can help boost your credit score as well. You may want to apply for a small personal loan from your bank and pay it back over the life of the loan. Other types of installment credit can include financing a car or buying a home.

So focus on the basics: “The same rules that apply to credit cards also apply to retail cards: pay on time, keep balances low and only apply for new credit when needed,” Paperno says. “For this reason, a credit report showing a solid retail card payment history, low retail credit utilization and few, if any, recently opened retail accounts can produce a good FICO score.”

Of course, a FICO score alone isn’t necessarily enough to guarantee you’ll get approved or rejected for a loan. To give you an idea of what influences lending decisions, I contacted several of the largest U.S. credit card issuers. While some of the banks didn’t comment, Wells Fargo did, saying its lending decisions aren’t solely based on traditional FICO scores. “We look at very predictable risk indicators of default such as increased overall debt burden, an individual’s payment history including the size of payments they are making and higher levels of revolving credit,” says Lisa Westermann, assistant vice president of public relations for Wells Fargo. “We approve a loan only when we believe the borrower can repay it under the original terms. All our lending decisions are based on doing what is best for our customers, our company and investors,” she says.

That’s why your initial focus should be on demonstrating good borrowing habits and cleaning up your credit report. By taking those important steps, a strong FICO score will follow.

Good luck!


See related: The FICO 5: The components that make up a FICO credit score, Retail cards 2010: Higher APRs, reduced rewards, Free credit reports: How to get the actual free one, ‘Hard’ inquiries have limited credit score impact, Decade-old credit mistakes shouldn’t appear on your report


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