NJ First-Time Home Buyers


Credit Scoring - Balances (3 of 6)

One of the most misunderstood areas of a credit score is the "balances" part of scoring.  I say that it is misunderstood not because it is complicated, but because people tend to have no idea why their credit score is low, when in fact they are carrying very high balances on their credit lines, a common factor in a low credit score.


I've seen credit reports where people were never late on a payment, yet their scores were in the 580's.  That isn't exactly a score to get excited about.  The credit scoring model views such a person as a higher risk, and grades them accordingly.

Your balance-to-credit limit ratio makes up 30% of your credit score, only second to that of payment history. Here is an example to understand how your balance is calculated: You have a $1,000 limit on your VISA card, and your current balance is $500, so you are at a 50% ratio.  The higher your balance is to the limit, the more it affects your credit score. It is even possible to go above your credit limit, which can really hurt your credit score. 

PRICELESS TIP ... Assuming you have two credit cards with a $10,000 limit for each card; It is better to have a $10,000 balance divied up between twoo credit cards, having a $5,000 balance each, then it is to have the same $10,000 in debt on one credit card (leaving the other card with a $0 balance). Use this system to maximize your credit score.     bob


 YES WE CAN! - Some fix-its for some common problems.


You can transfer balances from one card to another to "balance out" your debt ratio per card.  Depending on the scenario, this could improve a score by 50+ points. 

On occasion, a creditor will not report your credit limit.  Therefore whenever you have any balance on that account, your score is calculated as having credit accounts over the credit limit, negatively impacting your credit score.  What can you do to remedy?  Ask for your creditor to report your limit to the credit bureaus. This should usually work.  Another option is to max out your card and immediately pay it off.  When you do this your credit limit will be reported at the dollar amount you just used your credit card up to, and your balance ratio will then be accurate. If utilized this second way, your "new limit" should show for about 13 months.  NOTE: Do not max out your card if you do not have the money to immediately pay it off.  This will do far more harm than good. 

Ask for a credit limit increase every 6 months.  If you have paid your accounts on time, and a creditor hasn't automatically raised your credit limit, you can call and ask that they do so.  Sometimes they will automatically do it, and sometimes they will say that they have to pull your credit.  I would suggest you don't have them pull your credit, as it would hurt your score. 

Doing a balance transfer to a business credit card that is not reported on your personal credit profile is one way to raise their score.  Often business credit is not on one's personal credit profile. 

This article is number 3 in a series of 6.  Don't miss the other important factors in the credit scoring model, including many other ways to inrease your credit score.

Many scenarios are delicate and very specific action should be taken.  Incorrect action can have a negative affect on your score. Contact me directly to discuss your options and next action steps to improve your score or to qualify for your new loan.  ~  Steve Kappre


Credit Scoring - What Makes Up My Credit Score? (1 of 6)

Credit Scoring - Payment History (2 of 6)

Credit Scoring – Balances (3 of 6)

Credit Scoring - History (4 of 6)



Comment balloon 3 commentsStephen Kappre • October 24 2008 05:15PM


Wow! I always knew the higher the balance the lower the score but until now I never knew why.  Thanks for the information. 


Posted by Marie Ogle, Contract Mortgage Processor (Mortgage Processing Solutions) about 11 years ago

Unfortunately this is no longer correct :(  The FICO scoring model now hits us for having multiple accounts with balances.  Its now better to have 1 maxed out card and all others with a 0 balance.

Posted by Frank Kriticos over 10 years ago

Frank - there are differing schools of thought on what you stated regarding balances and spreading them out versus having one card with a higher balance. Experts on credit will disagree regarding this. As of right now the newer credit scoring models that are suppose to have these changes built into it (as you have discussed) are not in use yet. Personally I think it should be cumulative not based on one card. The reality is that someone with balances on many cards may indeed be a higher risk than someone that only uses one of their cards.

Posted by Stephen Kappre, Helping You Home (KW Hometown) over 10 years ago

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