High balance on just one card can hurt credit score

Reporter Jeremy M. Simon
Jeremy M. Simon is a former staff reporter for CreditCards.com who covered credit reporting and scoring issues.

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Question for the CreditCards.com expert

Dear Credit Score Report,
I currently only use one credit card, and it has a high balance on it -- greater than 75 percent of the card limit. But if you consider all of my cards -- none of the others have a balance -- then the amount owed compared to the credit limit is less than 15 percent. Does keeping a high balance on this one card affect my score, or do they look at total owed to total limit? What would be the best approach to improve my score -- or at least not hurt it -- while trying to refinance my house?  -- Frank

Answer for the CreditCards.com expert

Hey Frank,
Carrying such a sizable debt load on just one of your credit cards can have a serious impact on your overall credit score.   

Credit utilization -- the comparison of debt to credit limit -- is a key factor in the calculation of your credit score. According to experts, to maintain a good credit score, debt levels should not exceed 30 percent of your available credit. That's because the closer you get to your credit limit, the more likely you are to have trouble repaying your debt. To more accurately gauge your risk of nonpayment, the widely used FICO scoring model not only looks at overall debt in comparison to total credit limits, "the scoring formula also looks at utilization on the individual cards that make up the overall utilization percentage," says Barry Paperno, consumer operations manager at myFICO.com. Therefore, in order to improve your credit score, it's particularly important to keep relative debt levels as low as possible. This is especially true when you're on the verge of refinancing a home or making some other big financial move.

"Ideally, you should have low balances on each card you hold, as well as a low total utilization rate," says Rod Griffin, director of public education with credit bureau Experian.

To see where you currently stand, you can order your credit score at myFICO.com for $15.95. (Unlike credit reports that can be pulled for free once a year, you typically have to pay for a credit score, and in your case, it's a necessary move.) Your FICO score will fall somewhere in the 300 to 850 range -- with a higher score indicating lower risk. "If the score is good, the high balance on the individual account is not having a significant impact, and he should leave it alone until after the mortgage loan is approved and finalized. If the score he receives is poor, he might consider paying down the balance, if possible, or transferring some of the balance to one or more of his other cards," Griffin says.

Also, "he should pay close attention to the information accompanying the FICO score, such as the reasons the score wasn't higher and myFICO's personalized guidance for managing his credit over time," says FICO spokesman Craig Watts.

It is also important to get your free credit reports from the three major credit bureaus at AnnualCreditReport.com -- by law, you can get one free from each bureau every 12 months -- and read the reports over for any damaging errors and get them fixed. (For more on this, read our article on disputing credit report errors.) For now, however, we'll assume your report is accurate. With that in mind, let's take a closer look at Griffin's recommendations:

Pay down the balance: You should already be making regular, on-time credit card payments. However, to pay down that debt even faster, you'll need to come up with some extra cash. Start by taking a good, long look at your finances and figure how much money you have coming in each month (income) and how much money you have going out (expenses). Consider ways you could earn more money or ways to cut back on your spending. Those additional dollars can be put toward your existing credit card debt.

Spread the debt around: While your existing debt may all be on one card to take advantage of a low interest rate or great rewards, it is still worth considering spreading the debt across several cards. Using balance transfers, you can keep low balances on a handful of cards rather than a high balance on one card, which should help your credit score. Additionally, should any of your banks decide to close one of your accounts or reduce a line of credit, your utilization ratio will be better protected.

Here's how: To keep it simple, let's assume you have three cards with equal credit limits, including that one card with a 75 percent utilization ratio. If you use balance transfers to evenly spread that debt across your cards, each account will end up with a 25 percent utilization ratio. That's safely under the recommended 30 percent range.

Nevertheless, experts say you should first address the main problem -- why you have such a high debt level on one card -- before considering a balance transfer. "It is always a better idea to pay down high card balances than it is to spread them out over more credit cards, if the goal is a better FICO score," says Watts.

Good luck!

-- Jeremy 

See related: Compare balance transfer credit cards, How to dispute credit report errors, Lending standards show signs of easing, Fed report says

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Updated: 11-22-2017