30% of your credit score is attributed to the amount of debt you owe. This is a biggie!
It is best to keep your revolving credit lines (AKA Credit Cards) as low as possible. They really like to see your balances at less than 30% of your limit. There is no penalty to your credit score at all if they are kept below the 30% threshhold. Let’s say your credit limit is $10,000, you need to try to keep your balance at or below $3,000. If you get up to 50%, they start to penalize you a little, and over 50% the punishent gets even worse!
What can you do to fix this? I’ve got some ideas!
Pretend you have 3 cards. One is nearly maxed out (let’s say $8,000 out of $10,000), 2 have lower balances (a couple hundred dollars). You’re thinking you’re doing good to get those 2 nearly paid off, and you’ll get to that last one eventually. But, the credit scoring people look at that credit card that has a high balance and they don’t like it at all. It might be a better idea for you to spread out that $8,000 over the 3 cards more evenly. Now they see that you have 3 cards with balances under 30% each, no big deal.
Remember back in Credit Tip #2, I talked about closing your newest accounts? There is one way they can help you: If you transfer part of your larger balances onto them. If it is a store credit card, it is still better to close it, but if you can transfer some debt from your high blanace cards, they aren’t all that bad. Confused yet?
Another thing that will help with your ratio is if you ask for a higher credit limit. If you have that card with an $8,000 balance and a $10,000 limit, you can ask the credit card company to raise your limit. If you get them to raise your limit to $16,000, you just lowered your ratio from 80% to 50%. Obviously, it would defeat the purpose if you go run up that card though, so don’t be tempted!!
One last tip here, and this is a good one!!!
When your credit is checked, it is like a snapshot, one moment in time, not an overall impression. Let’s say you are the type of person who runs up your credit card balance every month but then pays it off every month. Maybe you’re a businessman who puts his travel and hotels on the card, then pays it off each month. Maybe you get cash back from your card or college savings for your kids, but you pay off that balance every month.
Now, imagine that your credit is reported to the agencies on the 10th of the month, but your bill is due on the 15th. You pay it all off, on time, but when it was reported, you were close to exceeding your limit! Let’s say this happens every month. Do you see where this is leading??
What can you do about it? Call your credit card and find out what day of the month they report to the credit bureau. Then, be sure you make that big payment BEFORE they report! Now, they are reporting that you carry a low balance on your card— instant improvement without really doing anything different.
Questions??? Just ask! I was confused about this one for a while.