HOW WHAT YOU OWE AFFECTS YOUR CREDIT
Posted on: Feb. 07, 2017 in Debt, Credit, Credit Score

Your credit score is based on a number of factors including your payment history, the length of your credit history, the type of credit you have, and new credit accounts you have recently opened. One of the biggest factors is the amount you owe. But it’s a little more complicated than just the dollar amount.

One consideration is how many accounts you have open with balances. The more accounts you have, even if the balances aren’t all that high, the more your score can suffer. Multiple open accounts can make you appear over-extended.

Revolving credit refers to a line of credit that allows you to borrow as you need it and, as you pay back what you borrow, that amount becomes available again. Credit cards are the typical example revolving credit. How much of your line of credit has been used is very important in determining your credit score. For example, let’s say you owe $500. If your total credit line is $10,000, owing $500 won’t hurt you so much. But if your total credit line is only $1,000, $500 represents half of your credit line. Being close to maxed out means your utilizing a large portion of your credit and creates concerns you’ll not be able to make your payments.

Installment loans are another type of credit. Examples of installment credit include car loans and mortgages. The percentage of the original loan that is still outstanding will help to determine your credit score. The more you pay down, the better your score will be. Successfully paying down installment loans show you’re a responsible borrower who can manage debt.

Overall, your credit score will be at its best when you utilize credit but not too much. When you show you can pay off your loans without becoming overwhelmed, your score will be higher.

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