Approximately 30% of your FICO score is based on this category.
Having credit accounts and owing money on them does not necessarily mean you are
a high risk borrower with a low
FICO score. However, when a high percentage of a person’s available
credit has already been used, this can indicate that a person is overextended, and
is more likely to make some payments late or not at all. Part of the science
of scoring is determining how much is too much for a given credit profile.
Your FICO score takes into account:
The amount owed on all accounts. Note that even if you pay off your credit
cards in full every month, your
credit report may show a balance on those cards. The total balance
on your last statement is generally the amount that will show in your credit report.
The amount owed on all accounts, and on different types of accounts. In addition
to the overall amount you owe, your
FICO score considers the amount you owe on specific types of accounts, such
as credit cards and installment loans.
Whether you are showing a balance on certain types of accounts. In some cases,
having a very small balance without missing a payment shows that you have managed
credit responsibly, and may be slightly better than carrying no balance at all.
On the other hand, closing unused credit accounts that show zero balances and that
are in good standing will not raise your
FICO score.
How many accounts have balances. A large number can indicate higher risk of
over-extension.
How much of the total credit line is being used on credit cards and other “revolving
credit” accounts. Someone closer to “maxing out” on many credit cards may
have trouble making payments in the future.
How much of installment loan accounts is still owed, compared with the original
loan amounts. For example, if you borrowed $10,000 to buy a car and you have paid
back $2,000, you owe (with interest) more than 80% of the original loan. Paying
down installment loans is a good sign that you are able and willing to manage and
repay debt.
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CREDIT TIPS
Keep balances low on credit cards and other “revolving credit.” High outstanding
debt can lower your
FICO score.
Pay off debt rather than moving it around. The most effective way to
improve your FICO score in this area is by paying down your revolving credit.
Don’t close unused credit cards as a short-term strategy to raise your FICO score.
Owing the same amount but having fewer open accounts may lower your FICO score.
Don’t open a number of new credit cards that you don’t need, just to increase your
available credit. This approach could backfire and actually lower your FICO
score.
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