1SD Newsletter: May 2004
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YOU NEED TO KNOW: The 20-Point Dollar

Sometimes just one dollar can have a big effect on a FICO score. In this case, it’s the dollar you don’t pay that counts.

Christine Ridgeway is a lender account rep with an interesting background. In her college thesis, she investigated the actual workings of FICO scoring.

Christine followed the credit habits and scores of nearly 200 people for 3 years. Her thesis was published in the Financial Times of London, and it contains many lessons for loan originators. One of the most interesting is what she calls the 20-point Dollar.

Mortgage professionals expect FICO scores to increase when revolving credit – credit cards, department store cards, etc. – is paid down, especially when the outstanding balances get below 50% of the available credit. But some believe, “If less is better, then zero is best.” It turns out that’s not true.

Fair, Isaac tells us, “Having a very small balance without missing a payment ... may be slightly better than carrying no balance at all.*”

Christine’s study confirmed this statement, and documented a case where the increase was 20-points!

* “Understanding Your Credit Score,” Fair, Isaac, www.fairisaac.com