If you have a large amount of credit card debt, you could be doing some pretty significant damage to your credit rating without even knowing it - even if you're never late on a payment. Your credit utilization, or debt-to-credit ratio, is major factor in how your FICO scores are calculated by the reporting agencies when you're qualifying for a loan, so it's important that you understand what your debt-to-credit ratio is and manage your debt accounts appropriately.
So What is Debt-to-Credit?
Your debt-to-credit ratio is basically the portion of your available limit that you owe. For instance, if you have a $3,000 balance on a credit card with a $15,000 limit, you have a very low utilization for that card.
However, if you have a $10,000 balance on a card with an $11,000 limit, you have a very high utilization that likely will appear "maxed out" to the reporting agencies. This is a significant risk factor in the eyes of the credit bureaus, and it's likely your FICOs will be scored down as a result.
Even worse, if you have multiple cards near their limits, you could be doing critical damage to your scores even if you never miss a payment. I've worked with plenty of mortgage clients over the years who have never missed a payment in their lives, but had fairly low credit scores because of large credit card balances.
Remember, lenders consider debt equivalent to risk. If you already have a lot of debt, it's risky to give you more, so your scores are going to be calculated accordingly.
It's also worth noting that this applies even if you always pay your balances in full each month. A credit report is a picture of your financial profile at a given moment in time, so if you have a high balance on a card when a credit report is pulled, your scores will reflect it.
How FICO Scoring Components are Weighted
The reporting agencies evaluate a variety of things when calculating credit scores, but some components of the calculations are given more weight than others. Check out the following weightings from MyFico.com:
Payment History - 35%
Amounts Owed - 30%
Length of Credit History - 15%
New Accounts - 10%
Types of Accounts Used - 10%
Your utilization ratio falls into the "Amounts Owed" category, which, as you can see, is given a pretty large weighting when it comes to calculating your scores. Again, even if you pay your bills on time, having a lot of credit card debt can still damage your credit scores pretty significantly. Based on the weighting it's given, it's safe to assume that the reporting agencies consider a high debt-to-credit ratio a significant risk factor.
Keep Your Balances Low
If you use credit cards on a regular basis, it's important to maintain your balances below 30% of the credit limit at all times to keep your FICOs strong. It may not be as big a deal to do this if you're not planning to shop for a mortgage anytime soon. However, if you do plan to apply for a mortgage in the near future, it's a good idea to keep your balances down until the new loan is finished.
Remember, this applies even if you don't roll your balances over from month to month. A credit report is a snapshot of your credit report at a given point in time, so if you have a high balance when the report is pulled, it could tug on your FICOs a bit.
Lenders put a lot of weight on your FICO scores, so you want them as high as possible. Even a reduction of a few points can cost you thousands more in fees and interest over the life of a mortgage - or disqualify you altogether.
If you're planning to shop for a new mortgage in the near future, set yourself up for the best mortgage deal possible by keeping your debt-to-credit ratio low. A lower ratio will help keep your scores strong and make it that much easier to get the best mortgage deal possible.
So What is Debt-to-Credit?
Your debt-to-credit ratio is basically the portion of your available limit that you owe. For instance, if you have a $3,000 balance on a credit card with a $15,000 limit, you have a very low utilization for that card.
However, if you have a $10,000 balance on a card with an $11,000 limit, you have a very high utilization that likely will appear "maxed out" to the reporting agencies. This is a significant risk factor in the eyes of the credit bureaus, and it's likely your FICOs will be scored down as a result.
Even worse, if you have multiple cards near their limits, you could be doing critical damage to your scores even if you never miss a payment. I've worked with plenty of mortgage clients over the years who have never missed a payment in their lives, but had fairly low credit scores because of large credit card balances.
Remember, lenders consider debt equivalent to risk. If you already have a lot of debt, it's risky to give you more, so your scores are going to be calculated accordingly.
It's also worth noting that this applies even if you always pay your balances in full each month. A credit report is a picture of your financial profile at a given moment in time, so if you have a high balance on a card when a credit report is pulled, your scores will reflect it.
How FICO Scoring Components are Weighted
The reporting agencies evaluate a variety of things when calculating credit scores, but some components of the calculations are given more weight than others. Check out the following weightings from MyFico.com:
Payment History - 35%
Amounts Owed - 30%
Length of Credit History - 15%
New Accounts - 10%
Types of Accounts Used - 10%
Your utilization ratio falls into the "Amounts Owed" category, which, as you can see, is given a pretty large weighting when it comes to calculating your scores. Again, even if you pay your bills on time, having a lot of credit card debt can still damage your credit scores pretty significantly. Based on the weighting it's given, it's safe to assume that the reporting agencies consider a high debt-to-credit ratio a significant risk factor.
Keep Your Balances Low
If you use credit cards on a regular basis, it's important to maintain your balances below 30% of the credit limit at all times to keep your FICOs strong. It may not be as big a deal to do this if you're not planning to shop for a mortgage anytime soon. However, if you do plan to apply for a mortgage in the near future, it's a good idea to keep your balances down until the new loan is finished.
Remember, this applies even if you don't roll your balances over from month to month. A credit report is a snapshot of your credit report at a given point in time, so if you have a high balance when the report is pulled, it could tug on your FICOs a bit.
Lenders put a lot of weight on your FICO scores, so you want them as high as possible. Even a reduction of a few points can cost you thousands more in fees and interest over the life of a mortgage - or disqualify you altogether.
If you're planning to shop for a new mortgage in the near future, set yourself up for the best mortgage deal possible by keeping your debt-to-credit ratio low. A lower ratio will help keep your scores strong and make it that much easier to get the best mortgage deal possible.
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