17
Jan

credit card balance and credit score

If yours is like 38 percent of American households, chances are you owe some credit card debt. The average American household debt is about $5,700, but the average balance-carrying household in the United States owes over $16,000 in credit card debt.

It’s no secret that carrying over revolving debt month to month isn’t doing your credit score any favors (plus, you’re probably paying an arm and a leg in interest). The more efficiently you can pay down your credit card balance, the more money you’ll be saving in interest and the better off your credit score will be.

It all starts with your credit utilization.

Credit utilization is a ratio that compares how much credit you owe to your total credit limits. In other words, it’s your level of current debt. So let’s say you have a total credit limit of $10,000, and you owe $3,500. You have a credit utilization ratio of 35 percent.

That’s not great. It’s best to keep your credit utilization below 30 percent, but the lower you can get it, the better off you’ll be. Your credit utilization ratio represents 30 percent of your total credit score. That’s the second biggest factor, after payment history at 35 percent. (Then you have length of credit history, at 15 percent, new accounts at 10 percent, and distribution of credit, at 10 percent.) Lenders look at this ratio to determine if you’re a risky candidate for credit — i.e., can you pay your debts? If you have a high credit ratio, lenders may be fearful of working with you.

Paying down your credit balance is one of the simplest ways to improve your credit utilization. And once you start improving your credit utilization ratio, you’ll likewise see an improvement in your credit score.

Tips for paying down your balance

Credit card debt may seem insurmountable, but this is a dangerous mentality. If you assume you can’t overcome your debt, you may simply stop trying. Any progress you can make in paying down your credit card debt is a step in the right direction towards improving your credit score. So get started immediately. Here’s how:

  1. Budget – Write down your income, your current debt, and your necessary expenses, and see where you can start cutting down and putting more towards your credit card balances.
  2. Prioritize your bills – In addition to payment history representing 35 percent of your total credit score, making timely, consistent payments above the minimum monthly payment is the surest way to make a dent in your credit card balance.
  3. Don’t max out your cards – If having a high credit utilization ratio is bad news for your credit, maxing out your credit cards is particularly dangerous to your credit health. In fact, if possible, stop using your credit cards at all until you’re able to make some serious progress on your balance. Also, don’t open any new credit accounts.
  4. Check your credit report to make sure there’s nothing erroneous that may be lowering your score. If there does appear to be something false on your report, make sure to initiate a credit dispute.
  5. Consult an expert – If you’re struggling to pay down your credit balances and get your finances back in order, a credit repair expert could make all the difference. The experts at Credit Repair can help create a customized game plan with your specific credit goals in mind to improve your overall credit score. Contact us today to find out more.

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