May
02
2014

Credit card balance can affect credit scores even if paid in full each month

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Dear Experian,

My credit score factors say “amount owed on revolving accounts is too high,” but I pay the balances off every month. I make more than $1 million per year and have no debt at all. Please explain why this is a factor in my score.

-  TRZ

 

Dear TRZ,

Income is not part of a credit report; therefore, it is not part of the credit score you obtain from Experian. Credit scoring systems predict the risk that a person will repay their debts as agreed regardless of their income or assets. It doesn’t apply to you, but just because a person makes $1 million a year doesn’t mean they will use it to pay the debts they owe.

Credit scores are a snapshot of your credit history at a moment in time in time. They are calculated based on the information that is contained in your credit report at the moment it is requested.

Balances on credit cards are usually updated by your creditors once a month and typically reflect the balance in your billing statement. If you tend to have high balances on your revolving accounts throughout the month, it’s likely that those balances will be reflected on your credit report when the score is calculated.

In addition to how much you owe, one of the most important factors in credit scores is how close your balances are to your credit limits. Credit scores add up the limits and the balances on your revolving accounts in order to calculate your overall balance-to-limit ratio, or utilization rate. The higher your utilization rate, the greater the negative impact on your scores.

One way to reduce improve your scores is to open additional credit accounts and keep the balances very low.  That will increase your total credit limits and improve your utilization ratio. But, do this well before applying for new credit to allow your history to stabilize and only if you won’t be tempted to overspend on the new accounts.

Another way to reduce the amount of revolving balances being too high is to pay them down and to keep them low throughout the month or pay them in full before they are reported to the credit reporting companies. You would only need to do that if your scores are too low and you are about to apply for new credit.

However, please keep in mind that scoring models must provide the factors that most influenced your score, even when you have a very good score. So, even when your balances are not really a problem, they still may be the most significant factor in a very good credit history.

Thanks for asking.

Maxine Sweet
Vice President, Public Education

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