Lindsey Hough

From Lindsey Hough, managing editor, the Wealth Builders Club: The amount you owe your creditors determines 30% of your credit score. But according to credit-tracking giant Fair Isaac Corp. (FICO), owing money isn’t always a negative indicator.

FICO is more interested in the utilization ratio, a measurement of how much credit you’re using relative to how much credit you have. This is your “debt-to-credit” ratio.

If you use up 80% of your available credit, for example, it could be an indication you’re overextended.

Here’s how the utilization ratio works…

Let’s say you have $50,000 of credit available through five different credit cards. You are currently using $10,000, spread out among the cards. That $10,000 represents 20% of your total ($50,000) line of credit. Your utilization rate is 20%.

You've Used 20% of Your Open Lines fo Credit

An overall utilization rate of 20% won’t negatively affect your credit score.

[Credit experts suggest you always maintain a utilization rate below 30%.]

But the utilization rate on the individual credit cards and lines of credit also affects your score.

In our example, you have about $10,000 spread across five different cards. But cards No. 1 and No. 4 are well over 30% of their limits (80% and 100%, respectively). This could have a negative effect on your credit score.

Bottom line: It’s better to have lower balances across multiple accounts than high balances on a few accounts. Keep all balances under 30% of their limits.

Wealth Builders Club members can learn the other key factors that make up your credit score—and an easy way to “bump them up”—inside the “DIY Credit-Repair Workshop.” It’s essay #7 in the club’s Debt and Credit Solutions essay series.

  Commit to credit repair and doors will open…

Following a divorce at 44, Melissa Chinwah discovered her credit score had plummeted to 348 (out of 850). She had 43 bills go to collections, and a car was repossessed. In need of housing for herself and her two small children, she decided to go after better loan terms.

Melissa committed to improving her credit. “Every day I would promise myself I would look at my score on my lunch break, and I would make myself do something, like write a goodwill letter,” she said. She wrote dozens of letters asking lenders to forgive black marks on her report. In the end, she removed 15 collections from her history.

She was able to successfully boost her score to 702 and buy her dream house.