How Your Overall Debt Affects Your Credit
The overall debt that you owe combining all of your debts together has a big impact on your credit in general. How much money you owe equates to 30% when your credit score is calculated by FICO methods. Calculated into your score is the total amount owed on all of your accounts as well as how much you might owe on different types of accounts such as your credit card, auto loan, mortgages and so on.
The more of your available credit limit that you might be using, the lower your credit score will be. To put this in perspective the average U.S. citizen uses about 32% of his or her available credit limit according to Fair Isaac.
Creditors like to look at how much of your available credit you are using as anyone using all credit available on a limit or maxing out a card makes them nervous.
Using too much credit can potentially harm your score. This is because studies by Fair Isaac have shown that people who max out their credit limits or tend to come close ten to have a much higher incidence of defaulting completely on their loans and declaring bankruptcy. If you don’t want to appear high risk to a lender who reports to a credit bureau – avoid maxing out your credit cards!
When it comes to revolving debt, credit cards and line of credit, the credit score formula is calculated to observe the difference between your credit limits on your accounts and your balance (the amount of credit you actually use. The bigger the gap is between your balance and your limit from month to month, the better off your credit score will be.
In general lenders report your balances to the credit bureaus about once a month. This can happen on a given day each month so you can be caught off guard if you have not made a payment. Some lenders also report bimonthly or quarterly.
The fact that your credit reporting score can be updated at any time by a lender (at practically a whim!) is why it is so important to pay your balances off on the day you they are due to be paid.
Some people think they have a day’s grace or a banking “business day†when they pay something like a credit balance. It doesn’t matter if you pay the balance off in full the next day. It is the balance that you owe on the reporting day that shows up on your credit report. This is why sometimes people who pay off their credit cards in full every month could still have owing balances showing up on their credit reports. Although paying the balance in full should theoretically raise their score it is lowered by the consistent late payments.
The credit score also looks at how much you might owe on any loan (such as a mortgage or automobile loan) that has to be paid in installments compared to the amount you originally borrowed. Lowering these balances over time and paying the money owed on time definitely helps your credit score soar higher.