30% of your credit scores are determined by your balances. Take some time to understand this aspect of your credit report and how it can affect you.
Understanding Your Balances:
FICO® will calculate the ratio of your available credit to your balances when determining your scores. This is very important for you to remember when trying to maximize your credit scores. Generally keeping your balances below 50% of the credit limit or original amount owed will help you to maintain your credit scores at a good level.
Remember FICO® is trying to determine the likelihood of you going 90 days late and statistically when your balances are high the chances for financial difficulties raise. Proving your ability to manage your credit will provide the best results for your credit scores.
Calculating Your Utilization Ratio:
There is often much confusion about calculating your balance ratio. FICO® takes the credit limit of revolving lines of credit and the original balance of installment loans to determine your available credit. Then they take the actual balance of the accounts that are reporting to determine the used credit. Dividing the used credit by the available credit will determine your Utilization Ratio.
Total Balance / Total Credit Limit or Original Balance = Utilization Ratio
Maximizing Your Scores
Buying a car for example is not a good way to raise credit scores. It will take YEARS to get your balances down to maximize your scores going this way. This is also the reason that you DO NOT want to buy a car if you are trying to finance a home – it will have a negative affect on your score while FICO® is determining whether you can handle the debt.
The following steps could help maximize your FICO® score:
- If you don’t have credit cards get 1 or 2. If you don’t have any credit cards get 1 or 2 with a high limit that you can easily pay off quickly. Get a name brand card (Mastercard, VISA, American Express or Discover) that you can use for a part of your budget such as a credit card just for gas or groceries. This way you know that you will have to pay them off quickly to continue using them.
- If you have credit cards with high balances pay them down or raise the limit. If you can afford to pay down your cards then do it! Another great trick to maximizing your scores is to ask your creditors for a credit limit raise. Being out of debt is the most important aspect to your finances but if you are one of the millions paying 30 to 40% more monthly on your debt and utilities because of your credit scores then this is a way to help you maximize your finances.
- Don’t refinance your auto loans. When you refinance your auto loan your may be lowering your payment but utilization ratio will be raised again. Also keep in mind that an installment loan will charge you a bulk of your interest on the front part of the loan so many times it may be more beneficial financially to keep the loan instead of paying more interest again.
If you are in the market of buying a new home or a new car you may want to explore these steps. Credit is not something that should be leaned on as an everyday part of life but rather should beused for large purchases. Understanding that your scores may drop when you make a large purchase can help you to plan to maximize your finances!