Credit Card Balances and Your Credit

Credit Cards and Your Credit Scores

Credit Cards and Your Credit Scores

It’s no secret – credit card balances are an important element of your credit score.  Most people know the general rule of “the lower the better.”   The lower credit card balances are better than high ones when it comes to your credit rating.  However, many don’t know the science behind how most credit scoring algorithms view credit card balances.

How Your Credit Report Sees Credit Card Balances

Credit scoring algorithms favor low credit card balances and typically reward consumers with low balances with higher credit scores.  You might be surprised it is not about the balance of individual credit cards (also referred to as “revolving accounts”).  Instead credit scores respond to the aggregate or total balance of all credit cards by comparing them to the total high limit of all open credit card accounts.  It’s as if you melted all your credit cards down into one big super card – at least, that’s how the credit scoring models see it.

The general rule is that the lower the total balance on all open credit cards related to the total high limit of all those credit cards, the better one’s credit score will be.  The key component to recognize is that the credit scoring agencies do not look at credit cards one at a time which means paying just one card down in a case where a consumer has several may not materially impact one’s credit scores.  Instead, a consumer with multiple open credit cards may want to build their credit card strategy around all open revolving accounts.

How To Improve Your Credit Score with Credit Cards

Once you understand the concept of how the credit scoring algorithms interpret credit card data, managing your credit score becomes a bit more clear.  Relative to credit card balances, it’s a matter of either paying your credit card balances down OR asking your existing credit card company’s to increase the high limit on your open credit cards.  The second option is cheaper (actually it’s free”) so it’s not a bad idea to start there.

Other Credit Card Related Credit Score Factors

Outside of the proportionate balance idea outlined above, there are other factors related to credit cards that can impact your credit.  The timelines of your payments, the age of your credit card accounts as well as the number / type of credit card accounts open at one time all play a role in your credit score.

By Jeremy House

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Jeremy is the Founder of The HOUSE Team and a Sr. Loan Officer/Branch Manager with PrimeLending. Over the past several years he has ranked in the top 1% of all loan officers nationwide and one of the top 200 loan officers in America. In the mortgage industry, the devil is in the details. Jeremy prides himself on being a student and an expert when it comes to everything mortgage related.

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