The second largest factor in a consumer credit scores is the amount you owe in relation to your high credit limits.
If a consumer is carrying high credit card balances, they can actually hurt their credit scores almost as much as paying the account late every month. This is because if they go late they affect 35% of their score that relates to payment history, but if they use a high percentage of their available credit they affect 30% of their scores.
This is why you should highly recommend to your clients that they get approved for new credit, especially credit cards with decent credit limits even if they are secured.
This aspect of consumer credit score has several different factors. The first factor is their relation of balances they owe on all of their accounts in relation to the high credit limits on those accounts. Once again, this takes into consideration balances on all of their accounts combined. Their credit score also takes into account balances in relation to high credit limits on their individual accounts.
For example, a consumer will be scored higher if they owe 30% or less on their credit card accounts. This means if they have a high credit limit of $1,000, they will have a higher score if they maintain a balance of $300 or less.
For revolving accounts, such as credit cards, a consumer wants to keep the smallest balances while still keeping a balance. They shouldn’t pay the account to 0, and not use it. If they stop using the account their credit score is not increasing. Have clients pay it as close to 1% as they can, but make sure they keep their balances below 30%.
Their scores will also be lower due to higher balances on installment loans, car loans, mortgages, and other non-revolving accounts. This is why credit scores will always be immediately lower if consumers open any of these accounts new. A new car loan, for example, will lower their scores once it goes on your report. How much lower depends on their spread of other accounts.
As loans and mortgages are paid down over time, the consumer’s scores will steadily increase. This is why one of the best things anyone can do for their credit is open accounts and pay them as agreed. Tell them to not pay those accounts to 0 too quick as they won’t be getting credit for paying that on time each month if that account if they has no balance and no payments due.
And remind clients that their score will be affected by how many open accounts have balances, how much of their total credit lines are being used, and how much of a balance they have on installment loans, such as car loans.
Clients can directly improve their credit scores by maintaining lower balances on their accounts or spreading balances over several different accounts. They can also get approved for new high-limit accounts to increase their scores.