Understanding Your Credit Score Part Two

Credit Utilization Ratio

The second largest factor in your credit scores is the amount you owe in relation to your high credit limits termed Credit Utilization Ratio, or CUR. This accounts for 30% of your score calculation. If you are carrying high credit card balances, you can actually hurt your credit scores almost as much as paying the account late every month. This aspect of your credit score has several different factors. The first factor is your relation of balances you owe on all of your accounts in relation to the high credit limits on those accounts. Once again, this takes into consideration balances on ALL of your accounts combined. Your credit score also takes into account balances in relation to high credit limits on your individual accounts also.

For example, you will be scored higher if you owe 30% or less on your credit card accounts. This means if you have a high credit limit of $1,000 you will have a higher score if you maintain a balance of $300 or less. For revolving accounts such as credit cards, you want to keep the smallest balances while still keeping a balance. Don’t pay the account to 0, and not use it. If you stop using the account, your credit score is not increasing. Pay it as close to 1% as you can, but make sure you keep your balances below 30%. Your scores will also be lower due to higher balances on installment loans, car loans, mortgages, and other non revolving accounts. This is why your credit scores will ALWAYS be immediately lower if you open any of these accounts new.

A new car loan for example, will lower your scores once it goes on your report. How much lower depends on your spread of other accounts. As your loans and mortgages are paid down over time, your scores will steadily increase. This is why one of the BEST things you can do for your credit is open accounts, and pay them as agreed. Don’t pay those accounts off too quick as you won’t be getting credit for that account if you have no balance and no payments due.

Your score will be affected by how many open revolving accounts have balances, how much of your total credit lines are being used, and how much of a balance you have on those accounts. You can directly improve your credit scores by maintaining lower balances on your accounts or spreading balances over several different accounts.

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