Dear Liz: I am confused about how my credit limits and balances are affecting my credit scores. I haven’t paid any interest on my credit cards in more than two years because I always pay off my balance before the due date. Then I figured out that the issuer was reporting my balance on the last day of the previous month instead of on the due date, so it looked like I was carrying high balances. So I started paying the balance in full before the first.
The first time I did this, my Experian FICO score shot up 30 points. But the next month I did the same thing, and it dropped back down. I was told my score was lowered because it “shows no recent balances.” Is this valid? Does it mean I should be paying the balance minus $20 before the first, then pay the rest after the first? This seems like making a system overly complicated.
Answer: First of all, the credit score you’re monitoring is not a FICO score. Although Experian sells FICO scores to lenders, it sells other scores to consumers. What you’re probably looking at is a PLUS score, which isn’t currently used by lenders. So any gyrations you’re seeing don’t necessarily reflect what’s happening with your FICO scores — and your FICO scores are the ones most lenders use. Although you can’t buy a FICO score for Experian, you can get FICO scores for the other two bureaus at MyFico.com for $19.95 each. Along with the three-digit numbers, you’ll get reasons behind your score and suggestions for improvement.
And paying down a balance before it’s reported to the credit bureaus is one way to improve your FICO scores, since it’s the reported balance that’s used to calculate your credit utilization — an important part of the FICO scoring formula. But you also can improve your credit utilization simply by limiting how much you charge to any card in a given month. A limit of 30% is good, and 10% is even better.