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Five Factors Of Credit Scoring -- How Much You Owe

Main Boise Home Loans

30% of your credit score is calculated by looking at your debt ratio...or how much you owe creditors and how you manage that debt.

It has been widely reported that household debt has been going up and up and up while incomes are shrinking. The Federal Reserve and other agencies have been reporting on this topic for some time now. Personal bankruptcy laws have tightened and minimum payments on credit cards have more than doubled...this has left us with a big consumer debt problem in this country. You NEED to understand how your credit score is being impacted by your management (or mismanagement) of your consumer debt.

In lending, we refer to this portion of your credit score as the debt ratio. Your credit scores are negatively impacted when you are utilizing a high percentage of your available credit. It gives the impression that you have overextended yourself.

There are two types of credit in this portion of your score: Revolving Debt and Installment Debt. Revolving refers to credit cards, in-store cards, and some home equity lines of credit. Installment refers to mortgages, car and student loans, and home equity lines of credit. By far, your utilization of revolving debt is looked at much closer and impacts your score much more than your usage of installment debt.

Fair Isaac and Co. says that the following elements are considered when calculating this portion of your credit score:

  • The amount you owe on your credit accounts
  • The amount you owe on specific types of accounts
  • Number of accounts with balances
  • The proportion of balances to total credit limits on revolving accounts
  • Amount of installment loan amounts still owing when compared to the original loan balance

This portion of your score is actually one of the easiest to improve on. In my next entry, I'll go over some ways that you can improve this portion of your credit score quickly...and permanently!

Posted by Eric Leigh at 4/10/2009 12:38:00 PM

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