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

Currently, 70% of all credit reports contain errors due to poor credit management.

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Whether you are just starting to first build your credit history or starting over fresh, there are real simple steps you can follow that can easily increase your credit scores.  These are the steps everyone should follow, since this is how everyone’s credit scores are calculated.

Step 1 – Payment History (makes up 35% of your credit score)

Open an account where the payment history reports to all three major credit bureaus.  The three major credit bureaus are TransUnion, Experian, and Equifax.  This factor makes up the largest part of your credit score.  If you credit is so bad that you feel no credit card company will approve a card for you, then I highly recommend starting with a prepaid credit card.  Everyone is approved and the account history reports to all three major bureaus like any other major credit card account would.

Step 2 – Amounts Owed (makes up 30% of your credit score)

The total balances of all credit line accounts should not exceed 30% of your total credit available for all accounts.  These pertain to revolving lines of credit.  So, your mortgage, auto loan, etc. does not count as a revolving line of credit.  Here is an example to simply understand what this means:

Example:
If you had 3 credit cards, all with a $1000 credit limit for each, your total credit limit would be $3000.  If each of these credit cards had a balance of $500, then your total balance would be $1500.  So, your total balance ($1500) over your total credit limit ($3000), would be 50%.

Step 3 – Length of Credit History (makes up 15% of your credit score)

If you are just opening your first credit account, it only takes about 6 months for the major bureaus to credit your scores in a positive way.  You want to make 12 months of payments as a goal for a good length in credit history.  The longer your history, the more it will help to increase your credit score.

Step 4 – New Credit Accounts (makes up 10% of your credit score)

When you apply for multiple credit accounts in a short period of time, your credit score will be affected.  It’s not a dramatic affect on your credit score, but it definitely can lower your score.  You are viewed as a risk, because applying for too many accounts in a short period of time looks like a desperate move to access money.  I recommend no more than 3 inquiries when comparing companies.

Step 5 - Types of Credit Used (makes up 10% of your credit score)

There are a variety of credit accounts, like mortgages, credit cards, auto, etc.  When you have established a payment history in multiple accounts it helps show you can handle different types of accounts.  This will help to increase your credit scores as well.

This should help you to understand how your credit score is affected.  Once you see your first positive increase in your credit score, then you will realize this can be done! 

Now, if you are someone that doesn’t want to take the time to do this yourself, that’s ok.  There are credit repair companies that do a very good job in helping you repair your credit scores.  In my years in working with credit, I would recommend the following:

1.  Lexington Law – Credit Report Repair

2.  Veracity Credit Repair

I encourage you to leave a comment or question that you may have about credit scores.