One of the most important factors that affects your credit score is the total balances versus the total available credit limits.
Most people don’t realize that the balance on your credit card can affect your credit scores almost as much as a late payment. Now, it doesn’t matter the balance on a specific credit card, unless you only have one card open, but the total amount of all balances of your cards versus the total available credit.
Example: If you have 3 credit cards, all with credit limits of $1000, your total available credit is $3000. If you have a balance of $300 on all three cards, your total balance is $900. Take $900 (the total amount of balances) and divide that by $3000 (the total available credit) and you will get a percentage of 30%. If this percentage exceeds 30%, it will start to affect your credit scores.
Some people ask if they should close a credit card account, because they don’t use it anymore or want to avoid using it. Well, this could affect your credit score.
Take the example above and let’s say you transferred that $300 balance to one of the other cards and closed that credit card account. Now, you have two credit accounts open, but you still have the same total balance of $900. Take the $900 in total balances and divide that by the total available credit, which is now $2000 and the percentage becomes 45%. This will affect your credit scores.
Before you close a credit card, figure out your total balances and total available credit, so you will know if it will affect your credit scores.
Learn more about credit:
Credit Advice About Choosing A Credit Card
Understand The Simple Steps To Build Credit Scores
Top 3 Things To Improve Your Credit Score
{ 2 comments… read them below or add one }
Joshua,
Thank you for this post. I am amazed at how many people I see and help that are not aware that a balance on their credit cards actually can change their credit score. I hear, “but I’ve never made a late payment.” Sounds like you’ve heard that too. I will be directing some folks to your blog for you easy to understand explanation.
Joshua -
Great advice! We deal with this issue so often as well. Or the fact that people think opening a credit card, paying the balance, and the closing it right away will not affect their credit score. It’s a hard lesson for consumers to learn, but an important one.