Amount Borrowed Compared To Available Credit – A Big Factor In Your Credit Score
Starting in 2009, the total amount you borrow compared to your available credit is going to become a bigger factor in your credit score than it used to be. It is calculated on an individual account basis and an overall basis.
How Is This Part Of Your Credit Score Calculated?
If you have available credit of $5,000 and you borrow $4,000 from that lender, it will show that you have used 80% of your available credit on that line or credit card. To keep your credit score high, you want to borrow no more than 50% of your available credit from any one lender. To really boost your credit score, borrow no more than 33% from any one lender.
This means it would be better to open additional credit cards, or lines of credit, with limits of $5,000 each, and borrow only $1,000 - $2,000 from each.
What Else Can You Do To Increase This Part Of Your Credit Score?
Some card companies do not report your total available credit line. Instead they report the highest amount you’ve ever borrowed from them. This reporting method can have a negative effect on your credit score. This is more easily understood by looking at an example:
Example:
Assume you have an available credit limit of $5,000, but the highest outstanding balance you have had is $1,000. If that lender does not report total available credit then instead they may show $1,000 as your maximum credit line for that account, even though they would lend you up to $5,000. This means even if you owe only $800, it will appear as if you have borrowed well over 50% of what is available.
Action Steps To Increase Your Credit Score
You can call lenders and ask them to increase your available credit and/or ask them to report your total credit line available. As long as you don’t borrow more, this increase in available credit will help your overall credit score.
In addition, as you pay off debt, do not close out that credit card or credit line. Instead, consider using it to pay a small monthly bill that you pay off each month. Research shows that people with the best credit history pay off credit cards each month, so a small amount of activity paid in full each month can help boost your credit score.
