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Sunday, March 17, 2013

FICO, Credit Building, and Credit Cards


So, I'm still hearing a lot of people say things that are not true, don't make sense, or are just plain bad advice. Credit building is not rocket science. Yes, the formulas and math behind them actually are akin to rocket science math. But some of the basic things the average person needs to know are actually quite simple.
If you want to build credit without paying interest or creating debt read on, or just skip to the bottom to the conclusion. 
I'm sure you've seen this funny video on TV:

I wrote a post previously about FICO and Credit Decisions, now I want to bring in the focus a little to some basics. The very first things you should know is that THE company that creates your credit score is FICO (the Fair Isaac Corporation). It was started by Bill Fair and Earl Isaac. It is now THE leading credit scoring company on the planet. FICO is the most used credit scoring platform accounting for over 100 BILLION scores sold to date. Excerpt: Engineer Bill Fair and mathematician Earl Isaac found FICO — with an initial investment of $400 each — on the principle that data, used intelligently, can improve business decisions. (1956)
There are other credit scoring companies that exist. Some, like Vantage Score, are making major headway into the field. However, for the time being, FICO remains the most used score on the market. When you apply for a Credit Card and you get a decline/approval letter in the mail. The score shown will most likely be a FICO score.

So, where is the first place you should go to find out how to manage your credit score? Why not ASK the ones who create it!? They created a website just for you, the consumer. You can read all about the who, what, when, where, and why of your credit score. It's not exhaustive, but it is thorough.
It's important to monitor your credit on an on-going basis, not just once a year. Because not only could Identity Thieves destroy your credit in a matter of hours, but mistakes, errors and forgotten cell phone bills can too! If you are restoring your credit, and disputing items, or paying off old items, you want to SEE those items update on your credit. You do not want to wait a year after paying off an old bad debt just to find out that the company never bothered to report that you paid them off.

If you want to monitor your credit without paying for it, there is a new site has just come out that is GREAT and FREE! It is, Ok, what's the catch, why is it free? Because it's the only site, first site at least, to be paid for not by your membership fee, but by ad clicks. The ad's are actually beneficial to you, and they give you a rating of how likely you are to get a product based on your score before you apply. HOW COOL IS THAT?! Downside? You only get one report, therefore one score. So if you want ALL three credit reporting agencies you still have to pay for that somewhere through an "Identity Theft Protection" service, such as

What do YOU need to know about credit? 

There are a lot of things that go into credit. Consult a credit adviser for YOUR particular situation. The advice I give here is for demonstration of the basics, do with it what you will. 
Here are some basics. There are five components to a FICO score. The image seen here is adapted from FICO's website and gives a breakdown of the categories. FICO scores are based on complex mathematical formulas and as such are fluid. There is no such thing as A + B = C with credit.When you affect one thing it could change the dynamics of the others. Therefore no two people would have the EXACT same result because no two people have the EXACT same creditors and credit histories.

FICO Chart
Many people ask me: "If I apply for this __XYZ Credit Product__, how will that affect my score?" If anyone tells you an answer other than "That Depends" they are clearly ignorant. I've heard so called advisers tell people "Oh, it will go typically only go down a few points..." While that may be true much of the time it may not be. A person with no credit history of any kind, that obtains a credit card, may find that adding something to nothing will cause their credit score to go up. A person with substantial positive history that does one application may find their score totally unaffected. The only thing applying does for a credit score is that it shows up as an "Inquiry".

Does that mean that if I get declined it will hurt my credit? Maybe yes, Maybe no. Your credit reports do not know that you got declined. They only know that someone inquired on your behalf. It could have been declined, approved, or maybe you didn't like the rate so YOU declined THEM. All they know is that the bank inquired (asked about you). MANY inquiries can be bad, just a few not so bad. Not all inquiries are the same. There is NO SUCH THING as a hard pull/soft pull. Just those that count and those that don't count. See FICO for definition.

What doesn't count for me? 

In short almost everything you've been told does. Cell Phones, Rent, Utilities all mean just about nothing to your FICO score. The only time those will show up is if they go to collections. So, by all means, pay them on time and don't let them go to collections. That will prevent credit issues. But your payments on those won't build your credit score with FICO.

Also, people are out there telling you to go buy a $300 TV on your credit card and make payments on it for 6-9 months to build credit. This advice is WRONG. Don't do it. And it's ultimately bad (at best not great) for your credit.

What does count for me?

Payments on Credit Products. Credit Cards, Department Store Cards, Loans, Auto Loans, Student Loans, Mortgages, etc...

Aren't Credit Cards Evil?

I'm going to give this advice to those who want to start from scratch or rebuild from scratch. This assumes you either have nothing on your reports in recent history, or you've paid off all old items, or your bankruptcy is finalized and you now want to start over. I give this same advice to anyone who wants to build from scratch. Much of this info will be good for the advanced credit builder to know too. This is MY PERSONAL opinion. It is based on years of experience and research and I believe it whole heartedly but it is just that, my opinion. Do your own research and verify what you need to before using it. 
So, you want to build your credit. Get two credit cards. Not one, not three, two. I know what you are thinking, credit cards are what created my (or others I know) debt problems in the first place. Well, yes and no. Yes they can be a tool for debt. No they don't have to be a tool for debt. A hammer is a tool for breaking glass jars or building furniture. It's the hand of the holder that guides it. Credit Cards are a tool, nothing more. Your problem has been perspective.

The banking industry actually studies and classifies credit card users. There are two primary categories. There are debtors and transactors. When debtors see $100 in their checking and $100 available on a credit card they see $200 to spend. When transactors see $100 in their checking and $100 available on a credit card they see $100 to spend and multiple tools to use based on the need. They could use checks, ACH, debit cards, cash, or credit cards... but it's all about the same $100. Debtors view credit cards as borrowing tools. Transactors view credit cards as transaction tools. It's all about mindset.

FYI: the banks actually don't like debtors. People who put a large balance on their credit card and make payments on it forever are the banks LEAST favorite credit card user, but most common. Sure the banks makes interest off of you. But they loose more money from debtors than transactors through charged off/collections accounts by leaps and bounds. The interest you pay is making up for losses. Transactors actually make the bank more money. Stores pay banks every time you buy something. The banks make more money from that than they do from interest. If you make one purchase and pay on it for six months you aren't buying new things and therefore aren't making the bank money. You are also MORE likely to stop paying on it and go to collections. They would rather you buy things, pay it off, not pay any interest, and buy more things. THAT is the real money in credit cards for banks, and those people get lower rates and better rewards for being wise credit card users.

In fact, the credit card is a powerful tool for the debt free! Credit cards are the only credit product in common use that a debt free person can use to build credit with and never create any debt or pay any interest. In fact if you create debt or pay interest on a credit card; it's proof you are not using them right in the first place.

FICO and Credit Cards

Credit Cards actually help you in all categories of your credit score, but most especially the top three. I'm pasting this chart again, so that you can take a closer look.

FICO Chart
  1. Payment History - 35%
  2. Amounts Owed - 30%
  3. Length of Credit History - 15%
Credit Cards have a direct, controllable, impact on 80% of your credit scoring categories. 90% if you factor in that limiting yourself to 2 credit cards and choosing other products to boost your score from time to time is the best way to go, and 100% if you factor in that old credit is better than new. Here's the way to work it. If you want to see how your credit compares against all the variety of catagories go sign up for a free Credit Karma membership and click on "Credit Report Card". 

Payment history

Payment history means one thing, and only one thing. How you made (or didn't make) payments on credit products. On your credit report, depending on how you get it they all "LOOK" different in format, there will be information regarding your payment history. The only thing that it shows is three things.
    1. No Data/Not Available/No Activity: These all have a neutral effect on credit. If nothing was due and nothing was paid, this will be the result. It may look like an empty box, a "/" forward slash, or a "N/A". 
    2. Positive Payment History: This just means that something was due and something was paid. It will be indicated by: "OK" paid as agreed, or a check mark, or "CUR" for current". The more of these you have the better your credit is. 
    3. Negative information. If you are late by less than 30 days this will not effect your credit. However if you are late you may see: "30", "60", "90" days late, or "COL""CO" for collections, or "CHG""CH" for Charged Off. The more of these you have the lower your score will be. 

The ONLY positive thing that comes from this is "CUR" or "OK" that means something was due, something was paid, all was well this month. You can get 12 of those a year. If you make two payments in one month you still only get ONE "OK" for the month. If you make a $25 payment on a $300 balance you get "OK". If you make a $1.50 payment on a $1.50 balance you get "OK". The MOST you can get in the way of positive information from  one credit account is 12 "OK"'s per year. 

MYTH: "Carrying some over to pay a little interest builds credit"
FACT: Paying your balance BEFORE your statement cuts shows nothing due, therefore you get an "N/A" on your statement, possibly. Waiting until your statement cuts, produces a "balance due". Paying it before the due date avoids interest AND shows "payment made" or in other works the "OK"/"CUR" that you wanted. 
So, instead of carrying a balance on your card. Go out once a month and buy a $1.50 Dr Pepper or a $5 cheeseburger  Wait until you get the statement and then PAY IT OFF IN FULL BEFORE THE DUE DATE. 

Amounts Owed. 

Amounts owed on credit cards is a tricky one. This may play out differently on true loans, but on "OPEN" or "REVOLVING" accounts (any and all accounts that you can use and then reuse again are considered open/revolving accounts), FICO actually wants to see you are using LESS not more. In general the FICO formula looks at the total amount you have in "Credit Limit" and the total amount you have "In Use" and comes up with a percentage.

If you have a $300 Credit Limit and you have a $250 balance on your card you are at: 83% Utilization. You have used 83% of your credit limit. If you followed the advise MANY are getting out there this is exactly what you did. You got a $300 card, bought $250 worth of stuff and made payment on it for months/years. This was exactly the wrong thing to do.

FICO says the LOWER your utilization score the better, except for 0%. They want to see SOME usage, but less is more. Someone with a 5% utilization will score better than someone with a 90% utilization. However someone with 0% utilization may appear to not be using the card and therefore not be able to demonstrate they CAN use one effectively. SO getting a card and putting it in your freezer may be a good way to stay out of debt, but not a great way to build credit.

Instead go out and buy that cheeseburger once a month and then pay it off. That will produce the payment history you need WITHOUT violating the utilization/usage requirements.

See these articles on this topic:
  • Credit Karma on Utilization
    • There are three easy ways to lower your credit utilization. The easiest way is to make credit card payments more than once a month so that your balance never gets too high. If you have more than one credit card, another good way to lower your utilization is to use multiple cards each month. This will result in various cards with low credit utilization rather than one with high utilization. Lastly, you can try to increase your available credit. If your income has increased, if you've maintained an amazing credit history, or if you have little debt, it doesn't hurt to ask for a credit limit increase. Just remember that this can sometimes result in a hard inquiry on your credit. If you lack excellent credit, try opening a secured credit card and adding to its security deposit over time.
  • MSN Money
    • Lenders like to see a big gap between the amount of credit you're using and your available credit limits. Getting your balances below 30% of the credit limit on each card can really help; getting balances below 10% is even better.
  • CreditCards.Com
    • Forget the old 30% idea Start by throwing out the old notion about 30 percent usage being OK. FICO, the company that originated credit scoring and is still the largest provider of such scores, has long advised score-conscious consumers to be far more stingy about credit use. The company had told people to keep it to 10 percent or less, says Anthony Sprauve, spokesman for, FICO's consumer website.
    • According to FICO surveys, credit scoring "high achievers -- those with a score north of 750 -- they're using an average of 7 percent of their available credit," Sprauve says. "I think 20 percent, for a lot of people, is more realistic. I would rather talk about that as a realistic goal that they can attain, rather than something that might feel like a stretch and out of reach." 
    •  Read more: Compare credit cards here - 
  • Market Watch
    • Most credit experts, including the credit bureaus, will advise you to keep your credit utilization under 30% of the total limit. But here's a secret: Make sure you do it for each card. If you exceed that threshold on one card -- say you use 70% of that limit but only 10% on another card and nothing on a third card -- you're under 30% of the total limit, but you'll still get dinged for using so much of the limit on the first card. How much of your limit you use in any given month can turn the tide on your card. If, for example, you max out your American Express card every month but pay it in full, you can still get slammed for hitting your limit. The credit card companies don't report if you've paid off your card; only how much you spent.

Length of Credit History. 

This is actually a very short thing to describe. The older your credit products are, the better. This is especially true with open/revolving accounts. The reason your score goes down, sometimes, when you go closing cards is because the AGES of your cards are being averaged. Having a 20 year old card and 18 year old card is better than having a 1 year and 3 year. If you MUST close a card and replace it with a new one go ahead. Try to stick to three at most at any one time.

There could be good reasons for doing this. Maybe the old card has no rewards, the company is lousy or even went out of business. You hate their customer service. It is what it is. So if you decide to get a new card, great. First, get the new card. Keep it for a year or two, then close the old one. Averaging a 15 year/10 year/2 year is different than averaging a 13 year/8 year/1 month card. So give the new one time to grow before closing the old one.

Bottom line, 20 years from now, try to have two cards that are between 15-20 years old.


So, after all that talking the advise is actually pretty simple. Get two cards. Go out once a month and buy something(s) for LESS than 10% of their credit limit, maybe even just a soda and/or cheeseburger. Then wait until you get your statement and pay it off in full before the due date.

If you are young and/or just starting out there is NO REASON, as far as your FICO score is concerned, to buy a bunch of stuff. Buy one thing, and pay it off every month for the rest of your life.

And that's how easy it is. Building credit, without debt or interest.

Other Options?

(Note: is this ALL it takes? No. The more history/experience you show with a variety of products the better. But if you want to keep things simple do it the way I show above.)

What if you want to go a step further? If credit cards are the only product to build credit with that can have no interest or debt, are there other low cost options?

Take out a loan, pay on it for 6-9 months and then pay if off.

I talked to a lady who had a ton of cash and liked to pay cash for cars, but wanted to keep up her credit. She went out and bought a car with a loan. Paid on it for 6 months and then paid it off, she did this every 2-3 years.

I've seen several people who had collateral (cash/car/house/etc) take out a loan, put the loan money into a savings, and set the loan to auto pay from the savings. Literally the loan money is just paying itself back. They may take out a 5 year loan, let it auto pay for 3-6 months and then add a little money to make up for interest and pay it off. JUST, to keep their credit going.

Rent vs Own

Things like this can do wonders. Are you renting? Why? You are paying someone else's Mortgage! Pray about it first, God may have plans to move you half way around the world tomorrow. So don't buy until you are where you know you are supposed to be. But, instead of buying someone else's house for them, buy your own. I heard one mortgage man say: Rent from the bank. We'll keep your house payments the same for the life of your contract, and in 30 years we'll give you the house for free!

They even have 15 year mortgage out there now. I know many people who bought homes with mortgage payments $100's per month less than they could afford in their budget, just so that they could afford to make regular extra payments and paid them off in ten years instead of 30. It can be done with planning. One chap I know paid his last house off in 10 years last month. Just bought a condo for $675 month on a 15 year note. He's renting it out for $1,300/month and putting all of that on the note. He'll have it paid off in 5 years, if he adds a few bonuses/tax returns to that also, could be faster.

Don't buy the biggest place you can afford. Buy a place for MUCH less than you can afford, pay what you can afford, plus occasional extras and you'll have it paid off in no time.


Mortgages CAN be easier to qualify for than cars, depending on the person, history, state, and type of mortgage loan. ASK, you may be surprised. I was declined for a Credit Card months before I was approved, barely by the Grace of God, for my home. It CAN be done. If God has given you the go ahead, it  REALLY CAN!

Have questions about anything I said here? Want to share your story? Comment Below!

I call you empowered 2 prosper with good success!

N2 Good SuccessDarrell G. Wolfe

See Also:
Books by Darrell G. Wolfe: 
Book Suggestions from the N2 Good Success Amazon Store
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Other Blogs and Sites by the Wolfe Family: 


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