How Credit Card Balances Impact Your Score

Published

February 17, 2015

Tom Quinn is Vice President of Scores at FICO (Fair Isaac), and has more than 25 years of experience in the credit industry with previous positions at FICO, Nomis Solutions, MDS (now known as Experian) and Citibank.

A reader, Dylan, recently wrote in with a question for us. He has three credit cards and wants to know if it is better (results in higher points) to carry similar balances across all three cards or to carry a large balance on one of his cards and zero or very low balance on the other two cards.

The exact answer depends on the balance and ratios dynamics on Dylan’s credit cards, as well as his overall credit profile.

How you manage your overall level of credit debt is a very important component of your credit score—and how you manage your revolving credit (like your credit cards) is especially important as the score is heavily focused on revolving debt. Generally speaking, credit scores focus on a consumer’s aggregate revolving utilization percentages or ratios—in other words, how much of their available credit is used. This is determined by taking the sum of all of your credit card balances as reported on your credit report and dividing that by the sum of the total available credit reported on your credit cards.

For example, your revolving utilization would be 50% if you have $5,000 in credit card balances and $10,000 in available credit on those credit cards. The higher the ratio or utilization percentage the less points granted as research show that consumers who carry higher ratios of revolving debt are substantially more at risk of missed payments, compared to people who have lower utilization ratios.

In addition to total or aggregated revolving utilization, the scores may also consider information such as the number of credit cards reported with a balance greater than $0 and/or the number of credit cards that each have a revolving utilization greater than “X” percent. A consumer may receive less than optimal points if they have a higher number of credit cards with a balance being reported or may gain points if they have a higher number of credit cards with very low revolving utilization on each card.

By design, the scores are complex and evaluate revolving card usage in several ways to predict future credit risk. When it comes to managing your revolving credit, the best advice is to make your payments on time and to keep your revolving balances low—this will help to increase your score over time.

Image: Phil Hawksworth, via Flickr.com