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Credit Score Question From a Reader

by Flexo on October 2, 2006

in Credit

Hi, faithful readers. I received a question through e-mail from Brian. He’s looking for some advice for managing his credit score. Here is what he asked:

If I pay off my minimum balance due, and say my remaining outstanding balance to credit ratio is 0.75, is this very bad for my credit score? I don’t have much of a credit history, because I am a student, and was wondering how negatively a high ratio will affect me. Is it generally the early on someone is developing a credit history, the lower the ratio needs to be to build early on a good score?

Also, if someone has 3 credit cards, and decides to cancel his first one (and does pay off the entire balance on that account), will there be any negative repercussions because of such action? I thought I read somewhere that cancelling anybody’s first card is a no-no.

Here are my thoughts (not advice). A credit score affects someone who is looking for a loan, looking for a job, or looking for an apartment. Even if you’re not in any of those categories, it helps to manage your credit score if you think you might be relatively soon. That being said, a lower balance to available credit ratio is always better, whether your credit history is new or weathered.

Common advice is to leave open your first credit card to record the longest credit history possible on your report. When you’re first starting out, there won’t be much difference in time between the opening of your first account and the opening of your latest, so in your case, I wouldn’t worry too much about closing your first card account. You’ll have a chance to build your history over the years.

It’s unfortunate that a credit score is often used to judge a person. However, as long as a report does not contain any errors, it gives a rough idea of how one is able to live up to a money-related agreement. You can stretch that and say a credit score can indicate how well someone manages money. This is why banks, apartment managers, and some employers (especially in financial jobs) will use credit scores to screen applicants.

If any readers would like to share additional thoughts and suggestions for Brian, please do so. I’m sure he (and possibly other passers by) will appreciate it.

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Flexo, the owner and creator of Consumerism Commentary, has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow him on Twitter.

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  • Brian
    Thanks for the help!

    If you were to give a ratio range that is good to have (that is outstanding balance: credit limit), what would it be? 0.25? 0.20?

    Also, isn't it generally easier to start with a great credit score and harder to lower it (excluding missed payments and blatant errors) by say not paying off the entire balance or whatnot, than it is to have a bad score from the geto and trying to build your way up? Or is it the same either way, from great --> bad or bad --> great score?
  • It's in fact QUITE easy to wreck a good credit score, than to improve a bad one. One late payment, or heaven forbid a 60 or 90 day late, can drop a good credit score by hundreds of points, whereas it will take months of on time payments to raise a bad score - particularly if you had multiple offenses in the past.

    Your credit utilization ratio should usually be under 30%, I've seen many places, but get it as low as possible. I don't know that it's a huge impact on the score for somebody young. I just graduated school and have great credit despite having had very high utilization ratios, I usually get dinged for the accounts-are-too-young thing.

    Making payments on time and keeping your report free of errors is basically all youneed to do to get a 700+ score. Everything else just comes with time and there is not much you can do to speed that up!
  • I'm no expert, but I held a question-of-the-day in August about credit cards and limits. I did some research before writing the post and found a WSJ article that discussed credit utilization, and how that affects about 30% of your score.

    According to that article, it's best to maintain a utilization of less than 50% (what you're calling outstanding balance:credit limit), and to spread it among a bunch of different cards, which (I think) would imply that "utilization" is calculated by averaging the utilization on each card and not by taking the overall outstanding balance/total credit.

    Hope that helps somewhat!
  • Utilization (balance/available credit) is considered on individual cards AND as an aggregate total on all revolving accounts. It does have a large impact on your score (30% as ricemutt mentioned). When carrying large balances, you may notice an impact on your score in increments. Of course maxing out a card is bad, but carrying a balance above 50% on any one card can also hurt. As the balance declines, the score will improve (assuming a clean report and all other things equal).

    A few years ago, I used to monitor my reports daily (preparing for mortgage) and lived on creditboards. I noticed my scores would improve as I reached util in 75%, 50%, 30%, and 10% increments. Based on my credit profile, I also noticed util between 5-10% is optimal for me. For others, it may be zero.

    When credit history is young and your file is thin, there isn't much working in your favor (other than having a clean report) so util should stay in the safe range...below 30%.

    I also agree with kira. It's a lot easier to ruin good credit than to build it. Even if you're doing all the right things, only time can improve your score. History accounts for 35%. Think of it as your financial "reputation." Takes a lifetime to establish but a small lapse in judgment can ruin it.

    For more details, I wrote about the infamous FICO score earlier tihs year.
  • Here's the link I referred to in the previous comment.

    http://singlemomandmoney.blogspot.com/2006/01/t...
  • Brian
    Thanks for all the help!

    I was wondering for Chase cards (cause I have one), if the credit limit will is the # used for the utilization. There were previous posts for Capital One where the denominator for the utilization was not the actual credit limit, but the credit SPENT. I was wondering if this was the same for Chase and which banks or credit card companies we have to watch for that do that.
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