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| Why does the amount of debt I have affect my credit scores? |
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Last Updated
27th of September, 2009
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The most important non-payment category in your credit score is, by far, the amount of debt that you carry, reflected as the percentage of your credit limit that you are using. This percentage is also known as your “debt-to-limit ratio,” “debt utilization” or “revolving utilization.”
Relevant debt in this case is not installment debt like your mortgage or auto loan – the debt that matters here is credit card debt: Visa, MasterCard, Discover, American Express. This credit card debt also includes anything that you use at a gas station such as a BP or Shell card, and of course anything issued by a retailer like a Macy’s card or Target card.
The balances that you carry on those cards can impact your credit scores almost as much as whether or not you actually make the payments on time. The bottom line for credit card debt: If you allow your balances to get too close to your credit limits, you will severely damage your credit scores.
If you want to truly improve your credit and you’re already making all of your payments on time, it’s very important that you keep your total balances at no more than 10 percent of your total credit limits. That’s on all of your cards combined, not just a few of them.
So remember: When it comes time to sit down and write that check to the credit card company, write it for more than the minimum payment. If you can, pay off your account balance each month. In this way you’ll earn the most credit score points from the “debt” category, and you’ll also avoid paying interest on your revolving account balance.
Read about the five criteria used to determine your credit scores. You can also get free debt consolidation and talk to a debt expert.
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