Transunion

Equifax

Experian

The next thing you want to take a look at is the proportion of credit limits to their current balance.  This is something pretty simple that can have an impact on your credit.  Your credit score is, in part, based on how high your balances are on your credit lines.  When I say how high the balances are, I am not talking about dollar amounts.  Rather, I am talking about the current balance as a percentage of the credit limit.  For example, let’s say you have a Visa with a $1,000 limit that you owe $900 on, and you have a MasterCard with a $5,000 limit that you owe $2,000 on.  Even though you owe more as a dollar amount on the MasterCard, the Visa card in this example is more of a negative for your credit score.

The reason for this is that you owe 90% of the credit limit on your Visa, but only 40% of the credit limit on your MasterCard.  In evaluating credit risk, you are considered to be more of a risk if your cards are maxed out.  If you have no available credit, and an unexpected hardship occurs, you are more likely to have money issues.  If you have money available to you when that same hardship happens, you are less likely to have those money issues. 

Now that you know the reasoning behind this part of the scoring, we can talk about how to manage your revolving debt in a manner that will reflect a lower credit risk to the credit bureaus.  A rule of thumb is that you don’t want to owe more than 50% of the credit limit on any revolving debt item.  A better goal is to keep the amount you owe under 30%.  Let’s go back to the example above.  You might want to consider a few different options.  The goal is to bring the Visa balance down below 50% of the credit limit.  The easiest solution is to simply make a payment on that card of $400 or more, and then continue to monitor the balance so it does not grow to a high ratio again.  That’s well and good, but what if you don’t have the money to pay the card down, or simply don’t want to?

Well, there are a few other solutions that get more creative.  Option number two would be to transfer a portion of your Visa balance over to your MasterCard.  If you transferred $400+ to the MasterCard, you would be below the 50% mark on each card.  But what if your Visa card carries a much lower interest rate than your MasterCard?  There is another option.  Call up Visa and ask for a credit limit increase.  Since we are concerned with ratios and not the dollar amount of what you owe, if you were able to get your credit limit increased to $2,000 from the current $1,000, you could leave the balance alone and get yourself under the 50% mark.  This can work well, especially if we are talking about larger dollar amounts on your revolving debt that you may not have the ability to pay down or transfer easily.

Hopefully this helps you out.  There is a lot more that goes into a credit score, and I will go into more detail in future posts, make sure to check back in often.  Additionally, I will be talking in depth about how to read a credit report and how to take care of collections and judgments that appear on your report properly.  If you are going to be looking for a home loan or refinance in the near future, or just want more information, contact me and we can put together a game plan that fits your credit risk.