Did You Know: How credit scoring models consider credit card balances?

Date: June 08, 2018

It’s no secret that how you manage your debt is a key component in your credit scores. What is poorly understood, however, is how your debt is measured. Credit card debt, even when it’s paid on time, can result in lower-than-expected credit scores, so understanding exactly how it’s considered is the first step in avoiding unwanted surprises when it comes time to apply for a loan.

Revolving utilization, debt-to-limit ratios and balance-to-credit limit percentages are all industry terms for how heavily you’re using your credit card accounts. Thankfully, the aforementioned terms all represent the same measurement, which look at the amount of your credit limit that you currently use.

Credit scoring models tend to look at credit card debt in several different ways, but the most common measure is just how “maxed out” you are on your cards. And, you guessed it, the more maxed out, the worse it is for your credit scores. But just how is “too maxed out” determined?

Go grab your credit reports. If you don’t have them on hand, you can claim them for free once every 12 months from all three of the national credit reporting companies, or CRCs (Equifax, Experian, and TransUnion) at the website AnnualCreditReport.com. Once you have reviewed your credit reports, identify and circle all of the open credit card accounts, even the ones with a zero balance.

Now the fun begins. Divide the balance on each credit card by that card’s credit limit, as reported on your credit files. For example, if you have a $2,500 balance on your Visa card and that card has a $25,000 credit limit then the math looks like this: $2,500 ÷ $25,000 = 10%. What you just did was to calculate the balance-to-credit limit ratio for that card.

You can even do this calculation using your credit card balance statements.

Most credit scoring models will take that measurement for every single one of your accounts, as long as they’re still open. The more credit cards you have, the more instances of the ratio are being taken into account.

Now take all of your open credit card accounts and add the balances together. Write that number down. Now take all of your open credit card accounts and add the credit limits together. This may include credit cards that have no balance and that you rarely use. That’s OK. As long as they’re open and on your credit reports, they will be part of our next calculation.

Let’s say, for example, that your total amount of credit card debt was $7,500 and your total amount of credit limits was $35,000. Like you did before, it’s time to divide the balance by the limit, so the math looks like this: $7,500 ÷ $35,000 = 21%.

You’ve just calculated what’s referred to in the credit scoring world as your “line item” and “aggregate” balance-to-limit ratios. Those two measurements are keys to maintaining solid credit scores. The lower those percentages, the better your scores will likely be, as this is highly influential to your VantageScore credit scores.

The balance-to-limit ratio is a moving target. Your credit card balances fluctuate month after month, and in some instances they can vary significantly. Just keep in mind that the consumers with the highest VantageScore credit scores tend to keep their balances to no more than 30 percent of their credit limits.

The best news about all of these balance-to-limit measurements is that not only are they very important to your scores, but they’re also actionable. Point being, if you have a large balance on one credit card, focusing on paying it down (or off) can lead to considerable improvement in your scores very quickly.

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