Ratio of Amount Owed to the Credit Line (AO/CL) must be less than 30 percent for any credit card
Part 21: As part of series of articles (blogs) regarding Credit and Credit Score, here we go:
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Ratio of Amount Owed to Credit Line should be Less than 30 Percent
The Ratio of Amount Owed to the Credit Line accounts for 30% of your Credit Score. This Ratio measures how you manage your finances and plan for crises. Amount Owed here is not about the dollar amount you are borrowing, it is about the dollar amount you are borrowing relative to the amount available to you.
Figure 4: Ratio of Amount Owed to Credit Line should be Less than 30 Percent
TIPS: Keep the Ratio of Amount Owed to the Credit Line (AO/CL) Less than 30% for each credit or charge card individually and for all cards combined. See example below:
Amount Owed/Credit Line %
40% Not OK
1.You should have a good cushion of available credit between your current balance and your credit limits on all open trades. This will have a positive effect on your credit score. This cushion shows lenders that you are unlikely to overextend yourself financially.
2.The ratio of Amount Owed to Credit Line should be less than 33% for each credit or charge card individually and for all cards combined. The lesser the ratio, the better the score. For example, carrying a $400 balance on a $1000-Limit credit card is bad for your credit score (AO/CL=40%). Whereas, carrying a $1000 balance on a $5000-Limit credit card is OK for your credit score (AO/CL=20%).
3.If you are buying a home sometime soon, don’t be tempted to open a store charge card to receive discounts. Though, these discounts can be huge, sometimes up to 25% of your purchases on the first day, usually you will be approved for a couple of hundred dollars more than what you plan to buy. This purchase will cause to nearly max-out your line of credit.
For example if you plan to buy a couch that cost about $1200, you may be awarded a credit line of $1500, in which case your (Amount Owed)/(Credit Line) ratio becomes 80% or about 88% including sales tax (almost maxed-out). This will have a negative impact on your credit score.
4.Not all creditors, lenders, etc will send their reports to all credit bureaus on the same day and/or time. If you or your creditor runs your report today at 10:00 AM, your credit reports and credit scores could well be different than the reports and scores if they run it a few hours later on the same day.
Try to find out, if you can, from each of your creditors when they send their monthly reports to the credit bureaus. Then, plan ahead and pay as much as possible, e.g., 1 week before the reporting day, to reduce or pay off your balance.
5.Time-by-time, request a soft credit line increase. Typically, creditors can increase your line of credit a couple of hundred or thousand dollars without running your credit report, if you have a good past record or relationship with them for a year or more. If your line of credit is increased, you’re (Amount Owed)/(Credit Line) ratio decreases and that is good for your credit score.
HOW to overcome the problems with your credit history and credit score?
Knowledge, education, awareness, practice and discipline are the essential keys to being successful on any subject. The book, "Credit Score Tips and Tricks", provides you information, tools, techniques to educate yourself and manage your credit report & credit score, and therefore manage your finances effectively at no additional cost.
I have decided to bring and share with you, chapters or sections of my book, Credit Score Tips and Tricks, as series of articles here. This is the number 21 of such a series.
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