Did you know that the balances on your accounts have a dramatic effect on your credit scores? The scoring algorithms look for risk. In the aspect of balances, it is looking for how much you are extended (or over-extended) with your current accounts. If you have say, 5 active credit accounts (not looking at mortgages) either revolving and/or installment type credit, and each one is nearly "max'd" out, your scores are getting hit.
In other-words, if your total available credit for these accounts is, for example purposes, $25,000; and you owe $20,000 on all of these combined, that is 80% extended. To the scoring system, you are of a greater risk! Why?
Because your balances owing are at such a high percentage of your available credit, the scoring says (with very accurate historical data to back it up) you are of a high probability consumer that will go out and get more credit from somewhere else or increase your current credit lines. Down goes your scores.
Now on the other-hand, if your balances are say, only $7500 (or 30% of available credit) the scoring algorithm determines that you are probably not likely to go out anytime soon and apply for additional credit anywhere, as you have enough available now that you won't need to do that. Your scores are going up because you are a lower-risk consumer... purely based upon balances. Make sense?
Although the bureaus will never tell anyone, even institutions, exactly how it all works (so that no one can try and manipulate the system); all indications are that 30-35% is the key number. Keep your balances below that and your scores stay up.
Helpful hint: rather than paying off balances entirely, just pay each one down incrementally and try and hit those 30% numbers and keep the accounts active. This will do more for your scores than paying one off entirely and having high balances on the others. Have a great week!
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