1. If you spend more than 50% of your credit limit every month, this indicates to the Credit Bureau that you do NOT have enough cash on hand to meet your monthly expenses. This will identify you as a high credit risk and will actually reduce your credit score by 60 - 70 points overnight (Fair
Isaac).
2. If you miss 1 or 2 payments on your credit card debt, the issuing company will skyrocket your interest rate to a whopping 27% -
30%!
3. Out of a random sample of 3 million American consumers (included in Experian's National Score Index), 51% of them have at least 2 credit cards and 14% of them have 10 or more credit cards.
Looking Through a
Lender's Eyes
The only thing standing between you and that personal loan,
credit card, car, job, apartment, or house (okay, so let's just
say it's the only thing standing between you and everything you
need in life) is your credit report – but do you know what they
are seeing? Each item on your credit report has 10 different
elements, and with the exception of 3, all of them can either
help or hurt your chances of getting that picket fence dream. To
find out how you look through a lender's lens, let's take a walk
down credit report lane.
Video: Surviving the Mortgage Meltdown
The Three Types of Debt
“Installment” debts are paid monthly in equal amounts for a
fixed period of time, such as
mortgages and auto loans. You can identify an installment debt by the
“account type” and “current status” elements on your report,
either spelled out or abbreviated by an I. Most credit cards, on
the other hand, are “revolving” debts, or a fixed maximum credit
from which you borrow, and pay depending upon your current
balance, with the remainder rolling over to the next month.
Revolving debts are indicated by an R in the “current status”
element. An “open” debt is an infinite credit line which you pay
in full each month, such as American Express credit cards and
cell phone bills. These are indicated with an O in the “current
status.”
Determining Your Ability to Pay
Video: Taking Charge of Your Credit Score
Lenders use how much you owe and how much you have to pay
each month to figure out if you can afford the loan or line of
credit. How much you owe, in total, is called your aggregate
debt. Lenders use your most current balance (usually from last
month's update) on all cards and loans to calculate your
aggregate debt. In terms of how much you pay each month,
lenders are most concerned
with how much of your current credit is being used, also known
as your utilization rate. To determine your utilization
percentage rate, you just divide how much you currently owe on
each card by your maximum credit limit. They also use your
minimum monthly payments against your income to determine
financial viability too. Finally, lenders take into account how
many accounts you have with a balance owed. So if you have an
auto loan and two credit cards with a balance that would be a
total of 3 accounts with a balance.
How it All Comes Together
Overall, the types of debt you have don't affect your score
as much as payment history. However, your aggregate debt makes
up 30% of your score, so be sure to get and keep your
utilization rate low. A good rule of thumb is to pay down your
credit cards below
30%, but don't close them or let them close from lack of use –
again, that payment history needs to be preserved. If you're
having a hard time paying down your credit cards, you can try to
have your credit limits increased, or get a new card to take off
some of the extra weight. The closer you can come to a 30% or
better utilization rate every month, the higher your score will
climb, and the same applies for “open” accounts too. For
installment debts, just make sure you make those payments on
time.
The only thing standing between you and that personal loan,
credit card, car, job, apartment, or house (okay, so let's just
say it's the only thing standing between you and everything you
need in life) is your credit report – but do you know what they
are seeing? Each item on your credit report has 10 different
elements, and with the exception of 3, all of them can either
help or hurt your chances of getting that picket fence dream. To
find out how you look through a lender's lens, let's take a walk
down credit report lane.
