Think making timely payments is all that matters when it comes to your credit scores? Think again. Obviously how you pay your bills is a very important factor in your credit scores, but it only accounts for 35% of your FICO credit scores. This means that the majority of the factors which make up your credit scores have nothing to do with your payment history at all, but rather the amounts owed on your balances.
The FICO Pie Chart
FICO, the leading credit company which sells credit scores to lenders in the United States, calculates your credit scores based upon 5 different categories of information. The data considered within these 5 categories can only be found in your credit reports themselves. If a piece of information is absent from your credit reports (such as your income, ethnicity, number of dependants, religion, or your checking account balance) then it is not eligible for consideration. This is good news because it means that you know exactly where to look when searching for ways to improve your credit scores.
As mentioned above, the top credit report category which factors into your credit scores is known as “Payment History.” Yet other information on your credit reports is also extremely important as well. Learning how to earn the most points possible in each credit scoring category is an essential step you need to take in your credit improvement journey.
The second most important category considered by FICO’s credit scoring models is referred to as the “Amounts Owed” category of your credit reports. The amounts owed on your outstanding debts determines 30% of your credit scores. While carrying a lot of debt does not necessarily mean that your credit scores are doomed, you could potentially be in trouble if you are revolving a high percentage of outstanding credit card debt from month to month.
FICO considers a variety of details when looking at the amounts owed on your credit reports. Here is a list to help you understand some of the most important credit information which is weighed within this category.
- Your Revolving Utilization Ratio on Each Individual Credit Card Account
- Your Revolving Utilization Ratio on All Credit Card Accounts Combined
- Your Number of Accounts with Balances
- The Amount You Owe on All Accounts Combined
A Deeper Look At Revolving Utilization
While your revolving utilization ratio is not the only factor considered when FICO takes a look at your debt, it is without question the most important factor within this credit scoring category. Carrying credit card debt can signify to lenders that you have overextended yourself and, as a result, represent a higher risk as a borrower.
In case you are unfamiliar with the term revolving utilization ratio, here is a simple definition. Revolving utilization refers to the percentage of your available credit limits which is being used. If, for example, you have a credit card with a $4,000 limit and a balance of $3,000 then your utilization ratio is 75%. Charge that same account up to $4,000 and your utilization ratio climbs to 100%.
The higher your revolving utilization ratio climbs the worse the impact is going to be upon your credit scores. Maxing out any credit card account is very likely to have a negative scoring impact, perhaps to an extreme degree.
Food for Thought
Since nearly a third of your FICO scores are based upon the amounts owed on your outstanding debts you could still potentially be facing significant credit score problems even if you routinely pay all of your bills on time. Making a plan to eliminate your credit card debt is a great step toward earning the stellar credit scores you want and need to lead a better life.