Credit Score Formula Changes

Your credit score could be changing. FICO, the formula most banks use to calculate your score, is launching a new system called FICO 08. Credit utilization is a key factor in the new credit score. Lets say you have a credit card with a limit of $4000 and you are carrying a balance of $1000. You're doing pretty well with carrying a balance that's 25% of your total limit. Then, your bank, as so many banks do these day, drops your limit to $2000. Problem is, you still have a $1000 balance and now it's 50% of your limit, something that could knock more than 50 points off of your credit score. Here's where it becomes a bit of a catch-22. Yes, your credit score could drop, but a lower limit could help you qualify for a mortgage or loan because now banks see you as having less potential debt. Wells Fargo Community banking President Robert Murray says, "a lender doesn't know if you say you have a $20,000 limit and you only have $2000 outstanding tomorrow you could have $20,000 outstanding.

Here's how your entire FICO score breaks down:

Payment History: 35%
Types of Credit: 30%
Amounts Owed: 15%
Credit History: 10%
New Credit: 10%

Now, unlike before, having one late payment won't kill your score, but don't make a habit of it, or else your score will suffer tremendously. So, in an effort to raise your score, getting rid of credit cards seems like the perfect solution, right? Not so fast... It all goes back to that credit utilization... Cancel a card and suddenly your combined credit limit on all of your cards drops, but you still have the same balance, hurting your score. Another new part of your score. The more different types of debts you have, the better, meaning taking loans, not putting everything on credit cards.