The amount of debt you carry determines 30 percent of your credit score, according to Fair Isaac Corp., or FICO. It's not just a matter of how big a balance you carry but how much available credit you have left on your credit cards. The exact effect varies: If you're barely above water, maxing out your cards will hurt you more than if your debt is under control.
If you have a $5,000 limit on your card and you carry a $1,000 balance, your debt utilization ratio is 20 percent; if you carry $4,500 on the card, it's 90 percent. Lower is definitely better. Your credit score takes into account how big the balance is on each card and how large the total utilization is for all your accounts. If you have two or three maxed-out cards and a couple with nothing on them, the untapped cards may improve your score.
Debt utilization doesn't determine 30 percent of your score by itself. The actual dollar amount you carry plays a role, and the number of accounts that carry balances. If you have installment loans, such as a mortgage or a car loan, the amount you've paid off is a factor. The scoring system that juggles all these elements is secret, so it's impossible to predict the effect of one element on your overall score.
The Good Ratio
If you'd like to know the ideal level of debt utilization for an optimum credit score, you have plenty of recommendations, but they're not consistent. Financial advisers have proposed everything from 50 percent down to 10 percent. FICO recommends you keep the ratio on every card no higher than 10 percent: This should benefit your score, subject to all the other factors. Top-flight borrowers have scores of 7 percent or less.
If you haven't thought about the balance limit on your cards in a while, look at them now. Work out your ratio, both overall and on individual accounts. Paying down the balances on the highest-ratio cards goes a long way to improving your score, as well as saving on monthly interest. Taking out new cards to improve your ratio is a mistake. Adding several new credit accounts hurts your score. Lenders may also worry the added credit is a sign you're about go on a spending binge.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.