April 8, 2006

Credit Score a function of Amounts Owed

According to Fair Isaac Corp, 30% of your total FICO score is a function of Amounts Owed.  This is second only to Payment History which weighs in at 35%.  In this article, I will discuss some strategies for improving your credit score with your existing credit cards. 

Your credit report should list a balance and a high credit amount for each trade line.  Generally speaking, the closer your balance is to your high credit limit, the lower your credit score.  This presents a serious problem for no-limit credit cardholders as the credit-scoring companies use the highest realized balance in making a credit-utilization calculation.  As a result, such card types can adversely affect your credit score.  Congressional testimony in 2003 revealed that Capital One admitted it routinely withheld credit limits, which had the effect of deflating credit scores.


Here are some suggestions to effectively lower your credit utilization percentage and increase your credit score:

1) The obvious — pay off or pay down your credit card balances.

2) Transfer balances between your credit cards.  If you have two credit cards with a $10,000 credit limit each, one card has a $10,000 balance and the other card is paid off; then, your score could be increased by transferring half of the credit card balance to the other card (having a $5,000 balance on two cards is better than having a $10,000 balance on one card).

3) Request a credit limit increase.  Of course, this will have to be accompanied by self control or else the situation could end up worse.

4) Do not close unused credit card accounts and do not let the creditors close these accounts.  You should use them occasionally and pay the balances off.  These trade lines are working in your favor.

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