Credit scores are one of the most elusive calculations to Americans in the modern financial world. Up there with income taxes in their complexity, understand one’s credit score and how it rises and falls is a common frustration for businesses and families alike.
Primarily citing the FICO score, used in over 90% of all credit and lending calculations, the factors that affect one’s credit score are broken down into five primary data points, each with their percentage of how much a score based on one particular point. This post is the second of a five-part series:
Balance Owed: 30%
This factor can be very misleading. Many assume if a decent sum of money is owed, one’s credit score must be low.
However, lender are much more interested in the percentage of credit being used, as opposed to the raw total. For instance, two individuals might be carrying the same amount of tangible debt, say $3,000 on a credit card, that does not mean their respective credit scores are affected the same way.
If person A owes $3,000 on a $5,000 credit limit, that will not have near the negative effect of an individual who carries $3,000 in debt on a card that maxes out at $3,000. Creditors want to see that credit users are not over-extended in their borrowing; that leads to late payments and non-payments, which refers back to the primary issue of consistency.
This is good news for households who do carry debt, but still have some credit to their name. Many people with very high credit scores do in fact have debt against them, but that amount of debt simply is not an overwhelming percentage in comparison to their total available credit.
Word to the wise: Avoid maxing out credit cards; that show’s lenders you are over-extended, and prone to mispayment.