One Step to a Better Credit Score
In “Anatomy of a Good Credit Score,” I discussed the factors that determine your credit score. One of the major components of the credit score calculation is the ratio of the amount of you owe to your available credit. The folks that calculate your credit score, Fair Isaacs & Co., report that about 30 percent of your score is determined by this ratio.
While there’s nothing you can do to remove negative information from your credit report (unless it’s inaccurate), you can control your debt to available credit ratio by paying off your balances. Easier said than done, right?
Creditors see high credit card balances, especially those very close to your credit limit, as a sign that you are a risky customer. In general, it’s best to keep your balance below 35 percent of your credit limit. For example, if you have a balance higher than $3,500 on a card with $10,000 credit limit, it could be hurting your credit score. Credit utilization greater than 50 percent is just asking for a credit score penalty.
At a minimum, you should shoot to keep your balances under 50 percent of your credit limit. Even better, trim them down to less than 35 percent. If you can pay them off completely, well, you probably wouldn’t be reading this article.
Keeping your balances low should get easier in the future, now that several of the leading credit card issuers have announced that they are doubling the minimum payment amount. The new, higher minimum payments will help you pay off your debts sooner – although it could spell trouble if you’re teetering on the edge of insolvency.
Remember that Fair Isaacs takes the type of account into consideration. A $100,000 credit card balance is treated much differently than a $100,000 mortgage balance. Translation: this advice really only applies to credit cards, not mortgages and car loans.
