How Can I Improve My Credit Score? – Part II

30% of your score is determined by the amounts you owe.  Since this is such a big influencer, it is important to understand what this means.  Simply stated, it means that you want to keep your balances low.  A good rule of thumb is:  spend no more than 30% of your available credit.  So if you have a $2,000 credit limit on one card, don’t spend more than $650 on that card.  If you should go above that figure, then pay it down as quickly as you can.  When you have high debt-to-credit ratios on your accounts, it negatively affects your score.  However, if you keep your expenditures below the mythical 30%, then your scores will benefit the most as long as you are making all your payments on time.

It would seem like a good idea, then, if you get into difficulty, to transfer your debts from one card to another to try and manage this magical percentage.  While this might work for you once in a dire emergency, it is not a good idea for the long term.  It just makes more payments to make, and more chances to be late and incur further charges.  You are better off to bite the bullet and pay down the account as quickly as possible.

If you have credit cards that have not been used in some time, do not simply close them.  Believe it or not, closing an account that you have had for a long time can adversely affect your score.  It affects two categories of your score:  1) amounts owed vs. total credit; 2) types of credit.

If you know that you are going to have an unusual expenditure that will move your debt above the 30% level, it might be advantageous to add a credit line.  This can extend the amount of credit available so that your overall expenditures will register on a lower percentage scale.  However, it would not be a good idea to obtain multiple new lines of credit.  This practice can actually hurt your score.  Example:  you have $10,000 in credit card lines.  You have spent $3,000 to date.  That means you have a 30% debt-to-credit ratio which is good.  You know you need to spend $2,000 and must use your credit to do that.  It might be advantageous to add a $5,000 credit line.  Total credit extended = $15,000.  You owe $3,000 now and add $2,000 to that debt.  Total debt = $3,000.  Your total debt-to-credit ratio is still 30%.  This takes forward planning, and may not always work out to your advantage.