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FICO Score Factor: Amounts Owed. Why Debt is More Than Just "What You Owe".

, by Rob Kaufman

The Amounts Owed category makes up 30% of your FICO® Score. That's why it's so important to understand what it means and how it's calculated.

What is Amounts Owed?

In a very general sense, "Amounts Owed" refers to how much debt you carry in total. However, the amount of debt you have is not as significant to your credit score as your credit utilization. (We'll get back to that in a second...)

FICO® research has found that your level of debt is predictive of future credit performance because the amount owed typically impacts your ability to pay all monthly credit obligations on time. Not to worry if you have debt - it doesn't automatically make you a high-risk borrower. However, as your balances increase so does the probability of difficulty meeting monthly payments on time, but that's just part of what determines your credit score.

Now... What is Credit Utilization?

So, you have some debt. Again, your outstanding balances don't matter as much as the comparison of that debt amount to your entire credit limit - better known as credit utilization. Simply stated, credit utilization is the percentage of amounts owed compared to the amount of your credit limit.

If, for example, you owe $1,000 on your credit card and your credit limit is $10,000, you're utilizing 10% of your credit limit. Typically, the lower your credit utilization the better.

All account types are not created equal.

The Amounts Owed category considers many factors, such as:

  1. The amount of debt still owed to lenders

  2. The number of accounts with outstanding debt

  3. The amount of debt owed on individual accounts

  4. The percentage of revolving credit line accounts in use (i.e. credit cards)

  5. The percentage of debt still owed on installment loans (i.e. mortgage)

When your credit score is calculated, all of these components are taken into consideration. So when trying to increase points within the Amounts Owed category (some tips for that are coming in the next section!) remember to keep these five factors in mind.

Something else to consider is that some account types have more impact than others. For example, revolving accounts (credit cards) typically carry more weight than installment loans (mortgage and auto). So consistently paying your revolving account balances down on time is one way to help you achieve a higher FICO® Score.

5 Tips to Help Maintain a Low Credit Utilization

Low credit utilization often leads to a higher credit score. So how are you supposed to keep it as low as possible? Whether you have a lot of debt or just a little, these five tips could help you maintain a low credit utilization so you can hopefully enjoy the benefits of a higher credit score.

  • Keep track of every card. Always know where your credit utilization stands for every credit card and set a limit for each card. When you start approaching that limit, make a payment or start using another card. Keeping up to date on your spending versus your credit limit is crucial to keeping your credit utilization below "risky" levels.

  • Request higher credit limits. Let's say you spend $2,000 each month on your favorite card, but your credit limit is $5,000. That's a credit utilization of 40%. If your issuer raises your limit to $8,000, you can spend the same amount each month and only reach a credit utilization of 25%. Although your request will often initiate a hard inquiry, which could temporarily affect your credit score, a higher credit limit may help you reduce your credit utilization ratio.

  • Discover the date. Call your issuer and find out when it reports your balance and payment activity to the credit bureaus. Make payments before that date, and you might find that your credit score increases.

  • Decrease your credit spending. Easier said than done, but try using cash or a debit card instead of your credit cards. This way you can start paying off your debt and hopefully see your credit utilization ratio go down.

  • Set balance alerts. Go online to your issuer's website and sign up to receive alerts, through text or email, when you've reached 20% of your available credit. That way you can have enough time to ensure you don't go over your limit.

There are lots of people talking about Credit Utilization at myFICO forums. See what they're saying and how they're working to keep their's low.

Rob Kaufman

Rob is a writer... of blogs, books and business. His financial investment experience combined with a long background in marketing credit protection services provides a source of information that helps fill the gaps on one's journey toward financial well-being. His goal is simple: The more people he can help, the better.