Common sense tells you that having too much credit will look bad to a lender. Obviously if you hold 6-8 credit cards with high balances, two or three car loans, a mortgage and some student loans, your budget is just aching to get busted!
And that is the rationale behind the credit reporting agencies’ scoring systems when it pertains to overall debt load. But as usual, a computer doesn’t read your bureau like a person, so you might be surprised by what a high debt load means.
To you and me, a high debt load means that you owe more than you can reasonably afford to pay. But credit reporting agencies can’t tell what you make, so they have no way to determine what your debt ratio really is. So they revert to some simpler math.
Their math just adds up your available credit (your credit limit) and compares that to how much credit you are utilizing (your balance). The thought here is that if you are using all your available credit, things must be bad for you.
That makes sense if you can’t afford the payments or you have lots of debt, but it can really hurt your score when your credit is limited as well.
Assume for a minute that you only have two credit cards and a car loan. All are relatively new (which hurts your score too, but that is a whole other article!) but small. If you have credit limits of $500 on the cards and a $5000 car loan, it is very likely you will be at or near your limit. So the credit agencies will lower your score!
The answer, of course, is to limit the number of accounts and the balances you have. An “ideal” balance is somewhere around 30% of your limit. So if you have a $1000 credit card, you need to keep you balance under $350.00.
A car loan won’t impact you in quite the same way and there is really nothing you can do about it except to consider getting the shortest term possible to make paying down the loan faster and easier.
And if you go OVER your limit, your score is in for a nose-dive. Going over you limit on a credit card will show that you are utilizing more debt than you have available and the credit agencies’ computers will really bang you score for that.
If you need our help, just give us a call at 877-942-2769 or send me an email personally at ajwiley@cawcawcaw.com. We are located at 537 Richmond Road in Staunton, VA just off I-81.
And that is the rationale behind the credit reporting agencies’ scoring systems when it pertains to overall debt load. But as usual, a computer doesn’t read your bureau like a person, so you might be surprised by what a high debt load means.
To you and me, a high debt load means that you owe more than you can reasonably afford to pay. But credit reporting agencies can’t tell what you make, so they have no way to determine what your debt ratio really is. So they revert to some simpler math.
Their math just adds up your available credit (your credit limit) and compares that to how much credit you are utilizing (your balance). The thought here is that if you are using all your available credit, things must be bad for you.
That makes sense if you can’t afford the payments or you have lots of debt, but it can really hurt your score when your credit is limited as well.
Assume for a minute that you only have two credit cards and a car loan. All are relatively new (which hurts your score too, but that is a whole other article!) but small. If you have credit limits of $500 on the cards and a $5000 car loan, it is very likely you will be at or near your limit. So the credit agencies will lower your score!
The answer, of course, is to limit the number of accounts and the balances you have. An “ideal” balance is somewhere around 30% of your limit. So if you have a $1000 credit card, you need to keep you balance under $350.00.
A car loan won’t impact you in quite the same way and there is really nothing you can do about it except to consider getting the shortest term possible to make paying down the loan faster and easier.
And if you go OVER your limit, your score is in for a nose-dive. Going over you limit on a credit card will show that you are utilizing more debt than you have available and the credit agencies’ computers will really bang you score for that.
If you need our help, just give us a call at 877-942-2769 or send me an email personally at ajwiley@cawcawcaw.com. We are located at 537 Richmond Road in Staunton, VA just off I-81.
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