Having been in this business as long as we have, we’ve seen just about every possible credit mistake in the book. And while most people know enough about their credit to try and stay on top of it, there are a lot of small, common mistakes that manage to slip through the cracks and bring their hopes of a raised credit score to a screeching halt. The most common mistake people make is carrying high balances on your credit cards.
Your revolving credit utilization has a big impact on your credit score
Despite the, uh, “slump” our economy has been in for the last couple of years, some people still seem to have no trouble charging any and everything they want to their credit cards. And unless Victoria’s Secret and the Apple App store have become necessities, these are charges you may want to reconsider. They are hurting your credit scores. A maxed out credit card can drop your score by as much as 80 points.
Understanding your credit score
Before we go any further, we should probably take the time to understand exactly what goes into a credit score. A lot of factors go into determining your score – your credit limit, account balances, payment history, and the age of accounts as well. Your payment history alone accounts for 35% of your total score, while the level of your debt makes up another 30%. Rounding out the score is 15% for the length of your credit history (the longer, the better!), and 10% each for inquiries and a mix of credit.
So how do high balances factor in?
The credit bureaus look at your level of debt as a measurement of how well you utilize your credit, i.e., how high your balances are vs. your credit limits. If you’ve been charging everything under the sun to your credit cards, your credit score will reflect frivolous habits with a decreased credit score.
How can I avoid this?
Stop spending all that money and start paying your debts down. The magic number we like to recommend for a reasonable balance is 20% of your available credit limit. So if you have a limit of $5000 on your Visa card, don’t spend any more than $1,000. Once you bring your charges down to this amount, keep them there, and it’ll be one less factor to worry about when repairing your credit.
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