Every month you make sure your credit card balances are either paid in full or paid down enough to keep them in check. You’re a smart money manager and do everything in your power to ensure your credit rating is always the best it can be. But did you know that even if you pay your credit card balances completely every month, your credit report may still show a balance when you apply for a loan? Hence, when a balance is shown, a loan can be denied due to the amount of debt it shows you owe.
How Important Is The Amount Of Debt? Actually carrying debt is not a problem when it comes to calculating your credit rating. In fact, it is good to be carrying some debt. You just don’t want it to look like you owe an exorbitant amount. When you apply for any type of credit and your credit report is run, the balance of your open lines of credit, including credit cards, is taken into account. Responsible creditors try to make sure you don’t overextend your resources, so the level of your debt is very important. In fact, the amount of debt you carry accounts for 30% of the points your credit score is made of. Your payment history is the only factor more important in calculating your credit score.
How Is the Amount of Debt Determined? There are three different factors which go into determining your amount of debt. First, there is your aggregate debt, which is a total of all the open balances you have. Then, there is the number of accounts you have with a balance. This doesn’t have anything to do with the actual amount of debt, but it does show how widespread your debt is which is considered to be an important factor. The third aspect to your amount of debt is what’s called your “revolving utilization”. The revolving utilization is calculated by dividing the total of the balances on your revolving accounts (i.e. credit cards) by the total of your credit limits on those accounts. It is this “revolving utilization” which you want to be as low as possible to increase your credit score.
How to Reduce Your Revolving Utilization This, of course, is why you pay your credit card balances down every month. But even if you make sure your credit card balances are paid before their due dates every month, your credit report may not reflect that when it is checked. How can that be? It’s simple. Balances are not recorded every day by the credit reporting bureaus. They are only recorded when companies send them the information, which is usually only once a month.
In this video , Jason M. Kaplan, Attorney and President of The Credit Pros, explains how to make sure you are paying your credit card balances at the right time to maximize your credit score. He explains how you can ensure your money management skills are reflected in your credit report so you can get the credit you need, when you need it: