Is a 40 point drop in FICO normal in 1-2 month time period normal? S applied for a Discover Card over a month ago, that’s the only activity I can think off that would affect his score.
I did read a few websites about various facts and basis for FICO score. Some people comment that it may drop your score anywhere from 15-30 points with new credit card application.
He has a BOA credit card before he started college in 2007 (before the law changed on age requirement), obviously this card has the longest credit history, then he got “sold” on another card which requires a ridiculous high balance in his savings account when he was at a branch 2 years ago, he wasn’t experienced enough to say no, what a mistake. Since now he gets his Discover Card, he plans to cancel his high balance requirement card, but it WILL further adversely affect his FICO score.
He has no plan to take out any kind of loans at least for a couple of years. I think he should still go ahead and cancel the card, take the hit in FICO drop now and move the money to a higher yield savings or money market account, yielding 1% instead of 0.04%.
Why would it adversely affect his FICO by canceling a card. He should cancel any card he doesn’t use because the credit line will count against total credit he could support based on his income, even if the balance is 0.
I actually believe it’s the ration of credit used to credit you have that matters. In other words, if you have a 0 balance on a high limit card, that is actually a good thing, not a bad thing. If you cancel all your cards and only have pretty low available balance, it may not be a good thing. Although I am not an expert on this.
I also am not an expert, but I am sure that acollegestudent is correct. You now have less credit available. We have some high limit cards with no balance on them that I’d love to cancel, but they are no fee, and I’m sure it would bring our scores down.
Credit utilization is the terminolgy - and closing an unused card is NOT a good idea. If you owe $2000 on credit cards and have several cards with $20,000 total in limits - you are at a 10% credit utilization. If you close one of those cards and say it had a $5000 limit - now you have $2000 owed on $15,000 in limits - now you are using 13% of your available credit.
Furthermore, assuming you had the card you are considering closing for several years and a good pymt history - you do not want to remove that history from your total credit profile.
The reason the score fell 40 points may be because he applied (15 or so points) and that the card was actually issued, so there is a weird calculation that he now is a little risky because he suddenly has a lot of unused, but new, credit out there. It’s fine and within a few months it will go back up, more quickly if he uses the card and pays as agreed.
I agree he should cancel the secured card if he doesn’t need it. It may also be possible to convert it to an unsecured card offered by that bank, and then he could keep it open. If he outright closes the account, there will probably be another drop of 10-20 points, but again it will be short term and I think worth it to get out of the secured card. You do get a slight drop when closing an account.
You can’t just look at total credit utilization, you have to look at each card. It is better to stay at under 30% of available credit on any one card. If you have 3 cards with a total of $20,000 in available credit, and one is $10k and two are at $5k, don’t charge $5k on one card and think, “I’m okay because I’m below 30% of my available credit.” Not really. You are at 50% or 100% on one card and at 0% on the other two. Each bank reports separately and the one with the $5k balance is going to show little or no available credit. Stay below 30% on all the cards. You also don’t know on which day the credit report goes in - is it the day before your payment is posted or the day after? The report is a snapshot of your account that you can’t really control.
The 40 point drop could also have been just a normal adjustment in his account, 15 points from the application, but the other adjustment because of credit utilization, a paid off account, an adjustment that had nothing to do with him but his zip code. If it fell from 790 to 750, not big deal. If it fell from 610 to 570, I’d be more concerned about the drop because it took him into another ratings class.
@twoinanddone, S now has 3 credit cards, one issued in 2007 (NOT a secured card, a regular card), 2nd one two years ago and Discover Card early June this year. He always pays his balance in full with automatic payment. He has been working for 3 years, currently lives at home and trying to save money to get a place of his own in 2-3 years. The card he wants to cancel (with a 2 year history) has no current balance, he stopped using it for a couple of months to make sure there is no outstanding balance on card. It has a $70 annual fee if your combined bank account balance (savings, mm, checking etc) falls below $50k. Yes, he saved almost every penny he makes except spending for some hobbies. He does not want to be stuck with that card, I want him to move his money to a higher yield savings account in another bank. He does not want to “invest” in other vehicles like stocks because he does not want to lose any of his money!!!
Credit utilization is only one component, the other component is how much credit you could have based on your income. If you have 50K in credit lines and you want to apply for a mortgage, the bank will take into account that you have 50K credit already. It is why you think hard before you agree to be a guarantor for someone’s car, house rental, or personal loans, because your creditors will count the guaranteed amount as part of your obligation.
If you have a very old CC that has no fee, it can be good to keep it because age of credit is part of your score. Since my kids were added as authorized users, their credit history is from mine and older than they are!
Whatever you do, don’t cancel two cards!! As noted by several others, utilization is a major FICO factor and eliminating two credit lines drive up the utilization rate, and severely impact your FICO score. The OP’s son is 3 years out of college, not a college student. Having multiple credit cards is not a concern for someone who is gainfully employed.
In fact, having at least two credit cards is normally recommended given our current environment of frequent identity theft/ credit card compromises. If you use your credit cards almost every day, like I do, (I travel frequently, collect miles/points and pay the bill off every month) you need to have a “Plan B”.
I am going to hijack this thread a bit, since my question is related to credit and someone reading this may have a clue (because I don’t). We put both of our kids on our main credit card when they began driving. They were just listed as card-holders. Later, we removed D when she went out on her own. Recently, she discovered that our credit card is showing up on her credit report … is this normal??? Is there a way to remove this card from her credit without shutting it down & reopening it? We charge everything to it & pay it off at the end of the month, which is fine for us … but when she goes to apply for a mortgage someday, we’ll have to adjust our charge habits prior to that time if it’s going to affect her.
Kelsmom, it should show up that she’s an authorized user, not an account owner who is responsible for the debt. If you pay it off properly, it should help her credit score. In the same situation, we were told if we wanted a card on which the young person is an authorized removed from her report, she just had to write the credit reporting agencies and request it, saying she was just an authorized user and is no longer one. We didn’t do it so I don’t know how successful it would be. That card may not be listed on all three credit reports.
We were informed that since we had excellent credit, having our kids as authorized users and having our CCs on their credit history would only improve their credit scores. They both have very high credit scores (even tho D has never had a full-time job), so I believe they are correct. I imagine your D could write and ask that the CC be removed from her report if desired, perhaps if both of your wrote a joint letter to all of the credit bureaus. Personally, I don’t see the point unless you don’t promptly pay your credit cards.
We like having multiple credit cards as some places don’t take one or the other and there are different benefits from different companies with different features. Our S also likes having multiple CCards and even D has three.
It does have an impact but it works just the … opposite way you describe!
First of all, the disclosure of income has little to no bearing on the FICO score as it is based on an evaluation of your credit and spending habits. The ratio is actually based on your credit utilization and not on an income. You could have zero income, a 50,000 total credit on ten cards, and have a higher score than someone with a 1,000,000 income and three cards with 10,000.00 but with 3,100 used! Trust me … I know!
What has happened to the OP is a number of factors that caused a lowering of the score that will be reversed soon:
Negative impacts?
One inquiry
A lowering of the age of the total credit cards. If one had one card from 2007, it had an 8 years "age" -- now he has two with an age of 4 years
closing an older card will also bring about a lower score (see credit utilization)
What will happen?
The additional credit (if unused) will soon offset the negative discussed above and the student will get a higher score.
If people are interested in helping students get a higher score, the safest route is to add a student to a VERY old credit card that carries a LOW unpaid balance but high credit limit and shows activity. This way the student gets the “aging” and is not hit with a high credit use. Obviously, it is NOT a good idea to add a student on a card that carries a high unpaid balance.
All of that could be made very clear by monitoring credit scores for a few months. Credit Karma “used” to be great to figure out but it has become more complicated. But then again, it is free! Cannot beat that part!
I’m unemployed, but the bank I use for personal checking convinced me to apply for their Visa, which carries no annual fee and a low introductory rate. I have a personal Discover card to which H is not a signatory. I opened it before the big crash in '08, and used it only sporadically before letting to go dormant for a time. H and I have joint MasterCard and American Express (Costco) cards. My personal FICO is excellent: 820.
However, the bank which asked me to apply for its card, came back and asked for proof of income in the form of a copy of our tax record before it would approve the application, so I said, forget it! It peeved me rather royally actually, because they were the ones who lobbied me to apply for their card, not the other way around. I had been quite content using my Discover Card very modestly, and paying it off at the end of each billing cycle. As far as I know, all our cards are paid in full at the end of each cycle. We hate to carry balances.
I have been wondering, however, what exactly my 820 score is based off of. I’d assumed the fact that my joint financial status showing stable income and very low credit usage to available credit would suffice for a Visa from my personal bank, and that it accounted for my high personal Score. But, the only FICO score I’ve been given in recent years is that reported to me by Discover Card whenever I open a statement. Perhaps that is calculated entirely based on my personal history with them. I don’t actually know what our joint score might be, though I assume it too is pretty good. I admit to being entirely mystified by the whole credit score game. I would though, like to know enough not to sabotage myself unintentionally.
Income does not factor into credit scores. Period. Of course a bank cares about your income when you take out a loan, but it has to get that income from you, it is not available on your credit score.
OP, your son should, IMO, cancel the ‘middle’ card, the card that has an annual fee AND a required $50k savings balance. THat’s ridiculous. It will make his credit take a slight dip for the reasons pointed out above, 1) closing the account and 2) a lower total amount of credit available, but both very small hits that will recover quickly.
During the crash of 2008-2009, banks were reviewing unused credit lines, including cards. I hadn’t used my Discover card in ages, and they asked if I still wanted it and I said no. Took a small hit, not big deal (now they beg me to come back and promise to reinstate my account to original date of opening it). My sister had an overdraft line of credit of about $8000 or so on her checking account (because when she was setting it up, she asked how much she should request and I said a little more than your monthly mortgage check so that the check will always clear), and the bank lowered. She never used it, but it made her mad they they took it away. Bank examiners were making banks tighten things. Now they are all back to raising credit limits, overdraft protections, and other potential loans. Just the other day my Credit Union increase my credit limit on my Visa by $5000 or so. It doesn’t matter to me, I never get to $300 on a $20k limit, that I think started at $500 more than 30 years ago.
Finally, kelsmom, are you sure that the report on your daughter’s account is still showing an open credit card (linked to yours)? The information that she had the account is going to show for years, usually 7-10, after she/you close it. If it is still showing as active, you need to get YOUR bank to take it off, to report it as closed at request of owner. Credit information is reported electronically, and you can send all the letters you want to the three credit bureaus, and they can remove it and report it as closed, and 2-3 months later, when the next cycle of reports hits, it will pop back up like a daisy. It has to be changed at the source. The law requires the credit reporting agencies send a copy of all disputes when someone pulls a credit report. Guess how often THAT happens?
Poetsheart - there are a number of FICO scores. To get a glimpse at yours, you can join a site such as creditkarma and it does NOT require a CC to join. It probably is not as comprehensive as some of the paid ones but it updates weekly. It should be different from the free Discover FICO and more recent.
The various credit scores use different algorithms but the basics are similar=
35% of your score is made up of your payment history
30% of your score is your credit utilization
15% of your score is your credit history
10% of your score is made up of the types of credit you use
10% of your score is your request for new credit