When people ask me why their credit scores are so low, the first two things I look at are their payment history and the amount of revolving debt they carry. Combined, these two things account for 65% of a person's credit score. I would like to focus on explaining what I mean by revolving debt.
Most people know that the balances they have on their credit cards is their revolving debt. What a lot of people don't understand is how this affects their credit scores. It all comes down to a simple equation: balance divided by limit. For example, if you have a credit card that has an available credit limit of $1000 and carry a balance of $100, your debt utilization ratio is 10%. Likewise, if you have a credit card with a limit of $20,000 and carry a balance of $2,000, your debt utilization ratio is also 10%. Don't confuse the fact that you may not carry large balances on credit cards with the fact that the balances you do carry only relate to the available credit limit for each card-again, it all comes down to the simple equation.
The FICO scoring model calculates total aggregate debt utilization. This means it adds up the total balances of all credit cards and divides it by the total available credit limit for all open credit card accounts. This is why I do not recommend closing credit card accounts. When you close credit card accounts, you automatically increase your debt utilization ratio by eliminating the available credit limit on the card you closed.
Shoot for a debt utilization goal of 10% or less. 30% is acceptable, but never go above 50%. Once your debt utilization percentage is 50% or higher, it carries a negative factor and will decrease credit scores. Lower is always better... Please contact me if you have any questions.
Remember to work on building relationships with clients by referring anyone who needs help qualifying for a loan because of poor credit to Premier Financial Solutions. I can work with them now and provide you with pipeline of business for the future. Let's make 2009 a prosperous year together.
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