Last week we discussed how your credit history accounts for 35% of your FICO score. The next biggest component comprising your score is the amount of debt you have which comprises 30% of your score. That means nearly two-thirds of your credit score is made up of your history and your amount of debt.
Doesn't My Current Income Outweigh My Old Debt?
Income has no bearing on your credit score. You could make $1,000,000 annually and still have a FICO score that stinks. What's important is the amount you owe. The amount owed is highly indicative of your future payment; it stands to reason the higher the amount owed, the less your ability to pay. History shows, as the balance owed increases, the probabliity of having trouble paying the balances increases.
The Six Components Of Debt: Amount Owed
- The amount still owed to lenders. This is combined with your history; if the amount is high and it's been owed for a long time, this will hurt your score. It's important to pull down that amount.
- The number of accounts you have with outstanding debt. Obviously, the more, the worse your score.
- The amount owed on individual accounts. This is combined with 2 above; if the number of accounts you have is high and the amount owed on many of them is high, this will lower your score.
- The lack of certain type of loans. The credit bureaus like a nice mixture: store cards, installment loans (like a car payment), revolving credit (credit cards) and a mortgage.
- The percent of your limit on your credit cards that's in use. Keeping your balance below 30% of your limit at the time your credit card statement is generated is best.
- The percent still owed on your installments, like your car.
FICO Score: Things Beyond Your Control
While credit cards are the most important when aiming to increase your FICO score, they can do the most damage if the information relating to them is derogatory.
Make sure you watch the utilization rate if you're thinking about closing a card (#5 above.) If you have two cards with a total limit of $10,000 with $1,000 charged on one of them, and you close the card that has no charges on it, you've just increased your utilization ratio from 10% ($1,000 / $10,000) to 20% ($1,000 / $5,000), which will lower your score.
However, if you've charged a large amount and you have the money to pay for it, send the money to the credit card company before your statement is generated. The credit bureaus see only the balances on the statement.
How do you think you rate based on the six components above?