Approximately 80% of your FICO score is based on something to do with credit cards so I want to share and clarify some of the common myths.

My favorite question – will opening a new credit card lower or increase my FICO score? The answer is yes, no or maybe. The easiest way to determine this is the number of existing credit cards you have open. The perfect mix of credit would include two installment loans (mortgage, car loan, student loan or something with a fixed payment) and three open credit cards with balances less than 30% of the high credit. If you only have one open credit card, I often suggest opening one or even two additional credit cards and most often your score will increase. If you already have three open credit cards and you open another card, your score may drop initially until you establish three to six months of payment history on that new card.

What makes up that 80% of my FICO score?

- 35% of your score is based on having good payment history, the length of the positive credit history and the severity and quantity of delinquencies on your accounts.

- 30% of your score is based on the amount owed on revolving accounts, so it is important to keep your revolving balance at 30% or less than your credit limit. For example, if your credit limit is $1,000, you should keep your credit card balance below $300.

- 15% of your score is based on the length of your payment history, so it helps to have long payment history showing that you use these accounts often.

Most important:

- Do not close your credit cards and use them at least once every one to three months so the creditor does not close them.

- Do not exceed your credit card limit on your balance or you could potentially lower your score by 30-40 points. I suggest you spread out your purchases across several credit cards. This minimizes the risk of a credit card company closing one of your cards because of a lack of activity which can lower your credit score.

- Avoid late payments on your credit card. One late payment on a credit card could potentially lower your score by 100 points!

Today, scoring models don’t consider whether you pay off your credit cards every month. They look at the ratio between your balances and your credit limit. However, if you prefer to charge all your purchases on a credit card to earn points, it is OK to have a higher balance but make sure your balance is lower prior to applying for new financing. Each credit card reports to the credit bureaus at different times of the month. Some report at the end, some report at the beginning and some even report twice a month. You can contact your credit card company to get the date of when they report to the credit bureaus.

Keeping your credit cards open and keeping your credit card balances low will have the most positive impact on your FICO score.

Jim Kaiser

Branch Manager, NMLS #1721861

Cherry Creek Mortgage, LLC, NMLS 3001