Credit Cards & Credit Scores

So late yesterday I’m on the phone listening to someone tell me how they’re going about raising their credit score into the “can do a mortgage range”— and I realize that whoever told them how, told them wrong.  When it comes to credit cards, it’s not the total amount of the debt that brings you problems.  No, it’s the amount you have outstanding on any given card versus the amount of the credit line.  This guy was telling me how he’d paid off all of his small balances (totalling $5000) and only had one card with $5,000 on it.  That card was maxed out, and lo and behold that little situation was actually driving his credit score (not up, but) down!

30% of one’s credit score has to do with credit usage.  Surprising to many, one maxed out $5000 card does way more harm to one’s credit score, than five $3000 cards with $1000 balances each.  It’s the same total amount outstanding, but since the amounts outstanding are about 1/3 of the credit limit there is next to no negative impact on one’s score.  In fact, low balances relative to credit limits implies conservative use of credit and actually enhances one’s score!

So, if you want to raise your credit score, when you go about paying down debt, bring the balances down relative to their credit limit.  Rather than setting a dollar amount as your goal, try setting a certain percentage of credit limit use as your goal.  Work those limits down below 33% and you’ll see your credit score rise, rise, rise!!!