How Much Does Your Available Balance Affect Credit Scores?

how does available credit affect credit score

The FICO score is shrouded in mystery. Nobody other than the people at The Fair Isaac Corporation, the inventors of the FICO score, knows how to calculate this three-digit number that is based on information in a person's credit report. People routinely try to arrange their lives around the known factors that affect their credit scores, one of which is how much available credit a person has.

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Effects Of Credit Utilization

Even though the formula for the FICO score is not published, The Fair Isaac Corporation does allow people to know the factors that play a part in calculating their credit scores. Available credit has the second-largest impact on your score; 30 percent of your credit score depends on your ratio of balances to credit limits. For example, if you have a $5,000 credit limit with a $2,500 balance, you have a 50 percent credit utilization ratio.

Ideal Ratio

The Fair Isaac Corporation has also published information on an ideal credit utilization ratio. To have a positive impact on your credit score, keep your credit card balances at less than 30 percent of your available limits.

Impacting the Ratio

A credit card holder can affect his

credit utilization ratio by either paying down his balances or requesting and receiving credit line increase. Requesting an increase is sometimes a catch 22; if your balances are close to your credit limits, your credit score may not be sufficient to secure credit line increases. In most cases, it is better to pay down your balances. You will not only reduce your utilization ratio, but you will also reduce your total amount of debt, making yourself more financially sound. Canceling cards will also affect your utilization ratio, but usually in a negative way by decreasing available credit.

High Amounts of Available Credit

Many people believe that having large amounts of available credit -- even with low debt utilization ratios -- reduces your credit score. This is not true. The FICO score does not take into account available credit alone, but only as it relates to balances. At one time, mortgage bankers would figure your credit limits on all of your cards as potential balances, and they applied that number to their debt ratio underwriting guidelines. This is not the case anymore, and the key to a good credit score is careful management of your available credit and keeping the utilization ratios in the ideal range.

Source: ehow.com

Category: Credit

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