Credit Card Balances and Your Credit

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Credit Cards and Your Credit Scores
Credit Cards and Your Credit Scores

It’s no secret – credit card balances are a major part of your credit score.  Most people know “the lower the balance the better.”   Credit scores go up when credit card balances go down.  Pretty simple.  However, the science behind the credit scoring algorithms view or credit card balances is not so well known.

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How Your Credit Report Sees Credit Card Balances

Credit scoring algorithms favor low credit card balances.  Kind of…. Consumers with low balances are rewarded with higher credit scores (in general).   Kind of… What if I told you it’s not about the balance at all?

Credit card balances are not the sole factor determining your credit score relative to credit cards (or “revolving accounts”).  Instead, credit scores respond to the total balance of all credit cards compared to the total high limit of all credit cards.  Imagine melting all your credit cards into one big super card.  That’s typically how credit scoring models see it.

In general, the lower the total balance on all credit cards compared to the total high limit of all those credit cards the better.  The key is that credit bureaus typically do not look at credit cards individually.  This means paying one card down will not always do the trick.  Instead, a consumer with multiple credit cards should evaluate total balances and total high limits collectively.

Improve Your Credit Score with Credit Cards

Now, understanding how the credit agencies view your credit cards you can manage your credit even better!  Relative to credit card s and your credit scores you have 2 choices:

  • Pay your credit card balances down
  • Ask for a credit limit increase

The second option is cheaper (actually it’s free”) so why not start there.

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Other Credit Card Credit Score Factors

Outside of proportionate balance, other factors related to credit cards also impact your credit score.  Timelines of your payments, the age of your credit card accounts as well as the number and type of credit cards open at one time all play a role in your credit score.

By Jeremy House

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