One Step That Could Improve Your Credit Score

credit-cardOne Step That Could Improve Your Credit Score

Everyone is focusing on credit card debt as it marches towards the 1 trillion dollar mark and a new all-time record high. Credit card debt would join the “I trillion dollar plus club” along with auto loans and student loan debt.

What people should be paying attention is non-revolving debt. This is debt that is paid back in installments. It sits at a record 2.69 trillion and there are tons of companies making these loans with tons of money to lend. It appears that the consumer is borrowing like crazy.

How could this be good for your credit score?  Credit card debt is much worst for your credit score than non-revolving debt and it is because of the credit utilization ratio (CUR).  The CUR is the ratio of credit limits and debt. In other words, how much of your combined overall credit card lines of credit have been used and represent debt?

For example, say you have 10,000 of credit lines through credit cards and you have 2,000 worth of debt.  Your CUR would be 20% which is considered healthy.  However, if it were 3,000 or more then it starts to have a negative effect on your credit score.  The CUA can have a big influence on your credit score.  A CUR over 30% starts to negatively affect your credit score.

The strategy is to take out a non-revolving installment loan and consolidate your credit card debt.  You are probably paying high interest rates and the interest rate on the non-revolving loan probably won’t be much better.  However, it could have a big impact on your credit score.  Let’s go back to the above example with 4,000 debt and credit limits of 10,000. After the consolidation your total debt stays the same and has the same effect.  However, your CUR went from 40% down to 0%.

Of course, credit score improvement is not guaranteed since everyone’s credit profile is unique and the overall scoring system is complex.  However, interest rates are high across the board on all consumer loan debt and non-revolving debt is not that tough to get right now. The key would be to keep those consolidated credit cards open and most importantly to not use them again.

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