Credit Card Balance and Your Credit Score How

much is best?

Clients of mine ask me this question almost daily–even more now that tax refunds

are being received and people want to pay down their credit cards from the holidays.

How much you owe on each card and your cards collectively affects your credit

scores. So what to do? Follow this simple advice to maximize your credit scores.

Keep your total utilization rate low. Add up the credit limits of all of your cards then

multiply that amount by 0.3 and that will be the maximum aggregate balance you

should carry to maintain healthy credit scores. Here is an example: you have 5 credit

cards with a total credit limit of $10,000.00. So $10,000.00 X 0.3= $3000.00 (30

percent utilization rate). The more you can reduce your balances below this 30

percent utilization rate the better it is for your scores; best of all would be to have

zero balances. That’s right, zero. Credit scores reward those who use credit wisely

which means paying off any balances monthly before the due date.

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Keep in mind that credit scoring models may not look at infrequently used cards as

part of your total credit limit. You should use each of your credit cards at least once

every three months. For myself I put a reminder on my calendar. Then when the

time comes I make a purchase with the card, wait several days for the charge to

post, then pay the balance. Easy! Keeping your cards active is just part of the credit

score game.

The 30% utilization rule above also applies to the balance you carry on each

individual card. Don’t carry a balance greater than 30 percent of your credit limit for

any single credit card. Again, a zero balance is always best.

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What if you have 5 credit cards with one nearly maxed out and 4 with zero balances?

Either pay the one down or use balance transfers to spread your balance out so that

no single card has a utilization rate greater than 30 percent. Easy Peezy!

A common myth I often hear is “department store credit cards don’t count towards

your credit scores”. Not true. Department store cards are treated the same as bank

credit cards by the various credit scoring models. Where people get into trouble with

these cards is the low credit limits they normally have. Typically, department stores

issue cards with a $300.00 to $500.00 credit limit making it very easy to have a high

utilization rate. With a $300.00 limit and a $200.00 shopping spree you now have a

credit score busting 66 percent utilization ratio for that account! If you go down this

path just be sure to pay the balance in full before the statement due date. Don’t wait

for the bill to come in the mail, it’s already too late by then since the department

store will have reported the statement balance to the credit bureaus’ and your scores

will have been dinged.

Richard Kramer is a nationally recognized certified credit consultant and personal

credit coach. He is the author of numerous articles offering lessons in responsible

and knowledgeable credit use. Visit his website RLKramer.com for more personal

finance tips and credit repair advice.