My husband and I have MULTIPLE (12) credit cards. All but a couple have pretty high balances but most are under 50% of the limit. However most of them have high APR. We are trying to pay off our debt and not hurt our credit score (its 720 right now). Would it be better to do a balance transfer and move the balances from all of the smaller cards to one high limit card (which would pretty much max that card since its 13,000) or would it be better to keep our balances on the existing cards since they are under 50% of the balance? Thanks, Danielle
Boy, that is a tough one and the quick answer is I cannot tell what the best option there is. You would be lowering your credit utilization on your smaller cards, but raising your credit limit to maxed out on your larger one. What I would do is the move the debts to the lowest interest rate card and then pay it off as quickly as you can.
Since you are asking about credit scoring and credit utilization, you might be interested in how your credit score is calculated.
Your credit rating is calculated based on several variables, including: your payment history (do you have any late payments, charge-offs, etc.), the amount and type of debt that you owe, if you have maxed out any of your trade lines, and then several other secondary factors like the length of your credit history and how many recent inquiries have been made to look at your credit history. Paying off delinquent or maxed out trade-lines will almost always help your credit score.
There are five key factors that go into calculating your credit score, with certain items carrying more weight than others. These factors are as follows:
1) Payment history, which counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.
2) Total debt and total available credit, which counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.
3) Length of positive credit history, which counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments.
4) Mix of types of credit, which counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.
5) The number of new credit applications you have recently completed, which accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.
While you cannot realistically calculate your own credit score, you can review your credit report for on the five factors I named above to get an idea of whether the accounts listed on your credit report are hurting or helping your credit score. You can then take action to improve any potential problems, such as paying down your balances or paying off collection items.
Also, factors such as age, sex, income, and length of employment, have no direct affect on your credit score, and are not considered when the bureaus calculate your score. Keep in mind that for most lenders, your credit score is only one aspect, albeit an important one, of your overall “credit worthiness,” meaning the creditor’s view of your ability to repay a loan. Your income, for example, is not considered in the calculation of your FICO score, but most lenders will ask you what you earn to analyze your ability to repay the loan. Even if you have an 800 FICO score, if your income is only $10,000/year, a lender will probably not loan you a large sum of money, because despite your past credit habits as measured by your FICO score, the lender can see that you probably cannot afford to repay the loan.
If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by Bills.com at http://www.bills.com/credit
We hope that this helped you to Find, Learn, & Save!