Your Credit Score Has 3 Parts
Did you know that a credit score has 3 equally important parts? Building a good credit score requires equal attention to all three parts; failure to do so may cause your credit score to be less than ideal.
If you understand the importance of paying your bills on time and avoiding too much debt you understand 2 of the 3 parts of a credit rating. Although just as important as timely bill payment and low debt, the part of a credit score that usually gets little attention is credit utilization ratios. Lack of attention is not the reason credit utilization ratios appear to be unimportant but instead lack of understanding. Lets try to help you understand what a credit utilization ratio is and how it effects your credit score.
The Lower The Better With A Credit Utilization Ratio
With credit card companies it’s all about risk. Consumers who are low risk get preferential treatment with low interest rates and annual fees. Your risk level is determined by how often you use your credit card and how much of balance you carry. If you use your credit cards sparingly and do not carry large balances your credit utilization ratio is low so you get labeled by the credit card companies as a low risk.
You can calculate your credit utilization ratio by adding up all of your credit card limits and dividing that number by how much of your limit you use. If your total credit card limits total $1000 and you have $600 of credit card debt, your debt-to-credit ratio is 6 to 10. This means that you are using 60% of your credit limits. That is very high. A low ratio would be anything less than 2 to 10 or 20%.
A Good Credit Score
How important is paying your bills on time? Very important, timely bill payment accounts for 35% of your credit score. The second largest chunk of your credit rating (30%) is determined by how much you owe. This takes into account your credit utilization ratio so be sure to pay close attention to that ratio. Calculate your ratio and keep it below 20%.