You've tried to use credit responsibly and paid all your bills early or at least on time. Yet your FICO credit score has done down. There are several things that can cause this to happen. It helps to know how the FICO scoring system works so you can identify possible problems early and take corrective action.
Structure
A FICO score is a three-digit number ranging from 300 to 850 that summarizes the risk you present if a lender extends you credit. When one of the three major credit bureaus (Equifax, Experian, TransUnion) calculates your FICO score, they use the information on your credit history. Your record of on-time bill payments is the most important factor (counting for 35 percent) but it is not the only thing considered. Your total debt, the type of debts you haveand recent changes in credit accounts are all factors that play a pert in determining your score.
Errors
If your FICO score has gone down although you pay all your bills early, the first thing to check is the possibility of an error. Incorrect information can get on your report due to a clerical mistake, incorrect creditor reports, or identity theft. Under the Fair Credit Reporting Act you can get a free copy of your credit report (not including the FICO score) from each credit bureau once per year. The Federal Trade Commission maintains a website that explains your rights and provides a link to the authorized provider of free annual reports (See Resources ). If you find an error, file a dispute with the credit bureau and have the information removed or corrected. All three credit bureaus provide online tools for disputes and the FTC publishes an online guide, How to Dispute Credit Report Errors (See Resources).
Excessive Debt
One common mistake people who are otherwise very responsible about their debt obligations is to borrow too much for their income. If you've accumulated too much debt, this can really hurt your FICO score as total debt counts for 30 percent of the score. The type of debt also matters. Secured debt, such as a mortgage or car loan, is viewed more favorably despite the large amounts that are usual for such loans. Unsecured debt, including signature loans or credit cards, can bring down your FICO score if the amounts are excessive.
Account Changes
Most people who pay their bills on time don't open or close credit accounts very often. Although it's normal to apply for a new account occasionally or to close one you've paid off, try to avoid a sudden flurry of account openings or closings. Too much recent activity can take up to 10 percent off your FICO score. The good news is that the FICO score only tracks recent activity of this type. After a few months to a year, account changes drop off your credit history and your credit score will return to normal.
Utilization
Another factor that can lower your FICO score is over-utilization of lines of credit (mainly credit cards). If you constantly keep your cards "maxed out" this results in a high utilization rate and lowers your FICO score. The solution to this problem is to start paying down the balances on your cards, thereby lowering the utilization rate. If your debt is excessive, this has the added advantage of lowering your total debt, so paying off credit card balances, or at least bringing them down, helps improve this part of your credit score as well.
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