Best Answer: Approximately 30% of your score is based on the ratio of how much you owe to the amount of your credit limit.
Having credit accounts and owing money on them does not mean you are a high-risk borrower with a low score. However, owing a great deal of money on many accounts can indicate that a person is overextended, and is more likely to make some payments late or not at all.
The rule of thumb is try to keep your amount owed to an average of no more then 30% of available credit. It doesn't hurt to go above every now and then, but keep it at that level for a period of time and your credit limit will increase (as long as you pay on time and pay more then minimum.
Even if you pay off your credit card balances every month, it could cause a negative effect on your credit score. Suppose that you use your credit card to purchase pay utilities, phone, gas, groceries, and everything else each month, always spending around $1,650
each month. When the bill arrives, you pay the balance in full, now you would think you would get bonus points for staying out of debt and paying off the balance in full each month, but not when you consider how you look on paper. What is your credit card issuer reporting to your credit report each month -- the total amount you owe at the time of the report and that you pay on time, not the fact that you pay your balance in full each month. Therefore, on paper, it looks like you carry a $1,650 balance on your credit card and never pay it off. This also would keep you above the recommended debt threshold of 30% of your available credit limit if your limit is $5000 or less. Therefore, a good idea would be to have 2 or 3 credit cards and rotate them, using one for a few months, then using another, so that your credit card company can report a zero balance every few months to the three credit reporting agencies.
Hope this answers your question.