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Many free financial websites and paid credit monitoring services offer an online service called a credit simulator. These simulators look at your current credit score, and tell you what affect certain actions will have on your score.
In other words, if you have $10,000 in credit card debt and want to know what will happen if you’re able to pay off $5000 of it, a credit simulator will let you know.
I’m going to walk you through one of my favorite credit simulators, the one at CreditKarma. Most programs work in a similar way, though. It’s important, after you simulate an action, to set your score back to your real score by selecting “reset all fields.” (Unless you want to look at the cumulative effect of different actions, like paying your bills on time for 6 months, then paying down debt and applying for a new card.)
At CreditKarma, you can select from a number of different actions, good or bad, from:
- Transferring balances
- Paying off all your debt
- Paying off specific amounts of debt
- Opening new cards
- Having an on-time payment history of 0 to 24 months
- Closing accounts
- Adding new loans
- Allowing accounts to become past due
Make Sure It’s Your Score The Program Simulates
When you’re using a credit simulator, be sure it looks at your specific score, which means you’ll probably have to pay a fee. Quizzle’s Credit Personal Trainer is $35, but CreditKarma’s score simulator is free.
Update: The Quizzle Personal Trainer technically isn’t a credit simulator because it shows you your improvement potential if you follow the plan Quizzle creates for you.
One of the tricky things about FICO scores, and the reason Fair Isaacs Co. can’t really tell you how they calculate scores, is that two people taking the same action can see entirely different results on their credit score. I’ve seen credit simulators that just ask you to enter your score manually and then perform simulations — these are not as accurate.
When I simulated paying off $5,000 in credit card debt, it dropped my credit utilization ratio by 3% and raised my score 25 points, pushing me into a better score bracket to qualify for better credit cards. For someone with more debt than I have, or a history of late payments dragging down their credit score, it wouldn’t have as great an effect.
The simulator was handy in helping me make an important financial decision. I’ve been considering applying for a new credit card with 0% balance transfers (like the Discover More card) to knock out the rest of my debt more quickly. This move, however, would only raise my credit by about 6 points. If my credit score was all I cared about, it wouldn’t make sense to take the risk. Here’s where credit simulators fall short.
Not the Whole Financial Picture
My credit score may only go up by 6 points if I did a balance transfer to a shiny new Discover More card, but a debt payoff calculator tells me that I’d also save about $1400 a year in interest.
Credit simulators also don’t take into account your personal spending habits. If you apply for a new credit card, it might raise your credit score by lower your credit utilization ratio. But if you’re the type to take your new credit card and go on a shopping spree, it’s a bad idea to open a new account no matter what the three-digit number says!
It’s important to use a credit simulator in conjunction with other financial tools, and common sense budgeting, in order to make the best decisions about managing your credit.
Remember, It’s Still Not Your FICO Score
Free credit simulators do not provide simulations of your actual FICO score. CreditKarma simulates actions on your TransRisk score (generated by TransUnion) and Quizzle looks at one of your Experian credit scores.
Because credit simulators are actually gauging the results, good or bad, of certain actions, and are not exact figures anyway, this isn’t terrible. It’s still a good idea to check your actual FICO score through MyFico.com before applying for a loan.
But, credit simulators will give you a good idea of the trends you can expect your credit score to follow if you take certain actions, which makes it a handy tool if you’re considering a balance transfer, applying for new credit, thinking about taking out a car loan or doing anything else that could raise or lower your credit score.
If you have credit card debt, seeing the projected results of paying down that debt, too, can inspire you to keep going on your path to financial freedom.