How Debt and Credit Work Together
Posted on February 9, 2009
Filed Under Credit Repair, Credit Report |
One of the major factors that determines your credit score is how much debt you have. In fact, your credit utilization accounts for about 30% of your credit score. Let’s take a look at how this works in a little more detail.
If you are completely overwhelmed with debt, chances are that your credit score is not in very good shape either. Think about it, if you had a friend that owed 20 other people money, and that friend then came to you and asked for a loan of $5,000 would you do it? Chances are that you would not.
Its the same with the credit bureaus, when they see that you are starting to overextend yourself, they will lower your FICO score so that lending institutions will not want to lend money to you.
Credit Use also takes a look at how maxed out your credit cards or other lending obligations are. So if you have an Amercian Express card with a $20k limit, and you are using $19k of that limit…that is bad. Your credit score will not be as good, if you were to pay some of that down. The preferable limit is to keep your credit card balances below the 30% maximum limit if you want to improve your credit score.
Now if you are really maxed out on ALL of your credit cards, then your score will really start to suffer. The key then is to find a way to start paying these down.
As you begin to budget your money and spend more wisely, you will be able to pay off some of your debts. As you do this, you will see a noticeable increase in your credit score.
There are many factors that come into play when trying to improve your credit score; but how much credit you are using is certainly one of the most important ones.
