Our Buying Habits Impact our Credit Report
Outstanding debt determines approximately 30% of your credit score. It is the second highest weighted criteria! Credit scores take into consideration the difference between the amount of available credit you currently have and how much of it you are using (aka = Utilization Ratio).
Specifically, for the purpose of the credit score, available credit can be broken down into two parts:
- Mortgage and Installment Loans –these loans are evaluated by calculating the amount of the original loan versus the remaining unpaid balance. Installment loans are typically mortgage and car loans or home improvement loans which have a set monthly payment extended over a finite period of time. Note – carrying several mortgage loans as a result of income property may impact your credit score as the additional mortgages can significantly increase the amount of debt on your credit file. Mortgage lenders will generally consider the additional rental income when making a decision on a loan.
- Revolving Credit –although mortgage and installment loans are included in the calculation, your revolving credit account balances are very significant and can potentially have the most impact on your credit score within this category. Revolving credit is evaluated by your “total revolving credit utilization ratio”. This ratio is calculated by dividing the total balance owing on all your open credit cards into the sum of the total credit limits for all open credit cards.
Note: – We talked last week about transferring balances and yet it is still recommended that you only do so as a last resort. It is always more advantageous to pay down the balance, especially on high interest cards.
Warning – If you exceed your credit limit on revolving or installment accounts, it may severely impact your credit score, and cause additional service fees and penalties to your account.
Again, the goal is to keep your utilization ratio at or below 30%. If you are above that, take action to reduce it using the strategies outlined here and in last week’s blog on “Transfer Balance Cards”.
- Review your credit reports; 1) Check that your reported overall extended credit matches your individual revolving lines of credit statements. 2) Run your numbers and check where your utilization ratio is currently.
- Reevaluate your purchasing habits. With the recent security breaches, many have altered their buying habits to include a reduction of Debit Card use and an increase in Credit Card use. It makes sense to put everything on one card especially if it offers great rewards, however, this one act may be skewing your utilization ratio. So do the math and adjust accordingly.
- Educate! Our program has many features and benefit; one to take advantage of is the educational component. What you don’t know may be hurting you so get educated and make your credit work for you instead of against you.
As always, if you have errors on your credit reports or items that do not belong to you and you are not having success getting them removed, contact me for help.
For questions or additional resources, please contact me at Info@CreditGal.CO