|
It is a common thought for consumers to be concerned with spending and how it will affect their credit. However, a few hundred dollars outstanding will not reduce your credit, especially if you already have a high credit line. When credit reporters figure out your credit score they use several different methods in attempt to properly rate your credit habits. One of ways that credit reporters can figure out how much debt you are in is by using the credit utilization ratio. The equation and explanation is outlined below.
Credit Utilization Ratio
To show you one method that credit reporters use, we will show you how you are evaluated using a basic ratio equation.
Step one:
The credit reporters look at the total amount of credit line you have. This means they calculate a combination of all of your credit lines. For our example let’s say you have one credit card with a $5,000 limit and one card with a $10,000 limit. This would make your total available credit $15,000.
Step two:
The credit reporting company will next look at all of your outstanding balances. Any unpaid accounts will be added together in this step. For our example let’s say you have one outstanding balance of $1,000 and one outstanding balance of $2,000. Your total outstanding balance would be considered $3,000.
Step three:
The credit reporters will finally divide your total outstanding balance by the available credit. In this instance it would be $3,000 divided by $15,000 which would equal 20%. This number means that you are utilizing 20% of your current credit.
There isn’t a special formula for figuring out how credit worthy you are based on this calculation alone. Credit reporters will of course take this calculation into consideration when figuring out your credit score such as how long your credit history is or how many types of cards you have.
Back to the original question, spending a few hundred dollars will probably not change your credit score, unless you have one credit card with an extremely low credit line. Also, even if you spend a few hundred dollars as long as you are making payments you will not be negatively charged on your credit report. Credit is suppose to be used for using money (with interest) so having an outstanding balance is not necessarily a bad thing. Often times consumers will acquire the most debt around peak times, such as Christmas, which is both normal and expected. However, some consumers make the mistake of neglecting the credit card bills once they have a few hundred dollars on their card. If you have outstanding charges it is vital to make the payments on your card in order to avoid negative charges on your credit report or an overall low credit score.
To find out more information on how your credit score is calculated, please visit the following research. Although credit utilization ratio is one way of figuring out credit worthiness, there are several other methods used. You can find out more about these through this site.
www.cbsnews.com/stories/2003/04/29/earlyshow/contributors/raymartin/main551521.shtml – Understanding Your Credit Score
|
