Hi Everyone,
I just wanted to post a little information about how the credit bureaus (specifically, www.equifax.com, www.transunion.com and www.experian.com) calculate your credit score in regards to your revolving debt. And just to clarify, revolving debt means debt that is not on a fixed repayment term (installment loan, like a mortgage or car loan). Hence, most revolving debt is credit card debt.
There are a plenty of common misnomers out there that suggest to close accounts or open accounts, do this and do that. But it’s really a pretty simple concept. You need to look at your total revolving debt and divide it by your total revolving credit limits, which will give you your “available revolving debt”. For example, say you have a total of $5,000 in credit card debt on two credit cards, and the total credit limits of those two cards are $10,000. That would mean you have 50% available ($5,000/$10,000 = .50 or 50%). 50% available is kind of the “mendoza line” as far as your credit score goes. You can have a picture perfect credit history, ie. never missed a payment in your life, but if your revolving debt is 90% of your credit limits, your credit score is going to be hindered quite significantly. And the reverse is somewhat true, if you’ve missed a few payments in the past (over 30 days past due from the original due date) but your revolving debt is only 20% of your credit limits, you very well may have a higher credit score than does the perfect credit history with the 90% debt.
So, what does all of that mean. That’s where you own analysis comes in to play. If you’re currently above 50% revolving debt, your goal should be to reduce it to no more than 50%. So, using that example, if you had $5,000 in revolving debt, and credit limits of $7,500, reducing your balances to $3,750 (50% of the $7,500) would do the trick. But not everyone has $1,250 sitting around to pay down the balances. So another strategy is to call your credit card companies to see if they’ll increase your limits. This goes back to the idea of opening and closing accounts. The only time I would recommend closing an account would be if you were already well below the 50% level. Otherwise, closing an account could raise your revolving debt % up above the 50% line.
But let’s say your credit card companies won’t increase your credit limits, and you don’t have the funds to pay your balances down to the right level, what next? Well, I recommend doing some due diligence to seek out more information to see if there are any credit cards available that might improve your situation (interest rates, card benefits, etc.) while also giving you an overall higher credit limit to work off of. The company that I suggest is Rock Bottom Credit Card Rates which has the best and most recent credit cards available from all the major issuers and banks (Visa, MasterCard, Discover, American Express, Advanta, Chase, Citibank, HSBC, Bank of America, Orchard Bank, etc.).
Whatever decision you make, at least now you know your goal should be to reduce your overall revolving debt down to no more than 50% of your overall credit limits. Best of luck.
