How High Credit Card Balances Can Seriously Wreck Your Credit Scores
If you have high balances on your credit cards, you could be doing serious damage to your scores even if every payment is made on time without fail. Credit utilization is a very important component of how credit scores are calculated, so it’s important that you understand how it works so you can position yourself to get the best possible mortgage deal.What is Credit Utilization?
Credit utilization is basically the ratio of your credit card balances to credit limits. For example, if you owe $10,000 on a credit card with a $12,000 limit, you have a high credit utilization for that particular card. This can make your credit scores suffer even if you never miss a payment.How Utilization Impacts Your Scores
The three major credit bureaus used by the mortgage industry (Transunion, Equifax, and Experian) evaluate several factors when they calculate your credit scores. Some factors carry more weight than others and are more important elements of the credit score calculations. The following is how the weightings are broken down according to MyFico.com:
If your scores are low just because of high utilization take comfort in the fact that your scores will rebiund quickly if you can get your balances paid down. Another trick is to get your credit limits increased, but please don’t do this if it’s just going to tempt you to get into even more debt.
Not good for your scores!
Also, beware of credit utilization when you’ re doing balance transfers. Very often the credit card lender you’ re transferring the balance to will set your new account limit at or near the amount you’ re transferring – which means you’ re basically maxed out right at the outset. Not good for your scores!