Hi all, I was just wondering. What actually provides you a higher credit score, $0 balances on your credit cards or very, very small balances on your credit cards? Just curious. CR
I haven't seen a clear report from anyone on whether FICO uses total debt to credit limit, or scores based on debt to credit limit for each account separately. There may even be a different formula based on what class a consumer is considered to be in, such as little credit history, vs. extensive credit history. The methodology is to statistically estimate risk based on the credit report information available, using comparisons with the population statistics for similar groups, which are similarly estimated.
Technically, $0 balances will score higher than small balances, but the difference is negligible. Again the actual formula is an unknown, but from my experience the formula works on breakpoints of utilization. Once you're below 50%, your score increases, again below 30% you see bigger changes. Once you're below 5% total utilization, you do not see much difference say between 0% and 3%.
$0 balance may be good for a while but if it is $0 all the time from what I understand that can make your score go down. The reason is because there is nothing to base your ability to pay back on. One rule I know is that you should try to never go above 35% of your balance. Use your cards once in a while and pay them off. My hubby works in the mortgage business and one mistake he sees all the time is people pay off all their cards and they close them all. Never do that. One part of the score is how long you have had the card. That is why people who switch cards all the time for 6 months of 0% interest will soon see their score go way down. 6 years looks way better then 6 months.
Time will increase your credit score. It doesn't matter if you have a balance or a ten dollar balance. As long as the creditor reports "paid as agreed" you are in good shape. What brings down your score is: -- Late payments -- Excessive balances (above 49%) -- Inquiries (they say the average person only applies for credit 1-2 times annually) -- Multiple new accounts within a one year period
i have just read in one the credit score publications that they do look at the ratio of available credit to credit debt...the book suggested that staying between 20%-30% was healthy but some argued that anything below 50% was OK...i don't think shooting for a $0 bal. will help...be sure not to close them out though...kris
