I have been asked by several friends and business associates recently about how FICO actually works. When one applies for a mortgage, personal loan, a credit card or in any situation where one’s ability to pay now and in the future is a key decision factor in granting a financial consideration approval. Everyone who has used credit has a FICO score or a variant of it . FICO ( Fair Issac Corporation) was founded in 1956 to provide a formulaic measure of consumer credit risk based on income, credit history and current approved debit/usage ratios among other factors.
It works in the aggregate, but it is not a perfect system. In terms of credit cards, Issuers have devised various enticing bonus rewards for a growing number of cards to entice Users to apply for a new card. It was once common for an individual to have 2-3 cards and that number has grown. Consumers will apply/get approval to grab those enticing sign-up bonuses and card benefits. Not uncommon to have an individual with 6-12 or more cards these days though their actual number of cards used on a daily basis remains far fewer. Once a sign-up bonus is achieved, not uncommon to stop using a particular card.
Everyone wants to have the highest possible FICO score which can range from 300-850. However, consumers are finding that having x number of cards can bring on a lower than desired FICO score. The challenge is that if one cancels a credit card – even if they are a good risk – their FICO score will be lowered – at least for a period of time.
There should be a provision to allow the cancellation of a card – which is in good credit standing – without incurring the penalty of a reduced FICO score. A driving factor in this is of course the credit Issuers who want Consumers to retain and use all those cards.
The wisdom from this is to choose your cards wisely and be frugal with the number of cards one has in their portfolio.