It may be because your credit score was not high enough. The unfortunate reality is that far too many people don’t know their credit score and the factors that come into play in determining it.

This article will cover in depth one of the most important aspects which goes into determining your credit score: your credit utilization ratio. The basic idea of the credit utilization ratio is how much of your available credit are you actually using on a regular basis?

A low credit utilization ratio means that you have a lot of available credit, but you are using a little of it.

Having a high credit utilization ratio means that you are using a large portion of the credit you have available.  The ideal credit utilization ratio is approximately 33%, depending on which financial advisor you ask.

That means you should try to be using only a third of the available credit you have.

Credit cards, loans, or any other credit lines also factor into this ratio. You want to have a lot of available credit, but only use a little of it.

For example, say you have four credit cards with the credit limits below.

XYZ has a $40,000 limit
ABC has a $20,000 limit
NYC has a $75,000 limit
HJI has a $30,000 limit

Each of these cards’ credit limit is report as your “high credit limit” on your credit report.

Lets say you use each of these cards regularly and they have the outstanding balances listed below:

XYZ has a balance of $13,500
ABC has a balances of $18,000
NYC has a balance of $47,000
HJI has a balance of $17,000

If this were the case you’d have $95,500 in utilized credit out of a possible $165,000 available. This would you you have a total credit utilization of 58%, which is higher then the recommended amount. (Remember the highest we suggest is 30%

According to FICO, the average utilization ratio for the nation is a bit above the recommended 33%

On the other hand, say you have those same four credit cards.

But this time, the spent balance on XYZ is $6000, ABC is $5000, NYC is $7000, and HJI is $2,000.

If this were the case, you’d be utilizing $20,000 of your available $165,000 or a 12% utilization rate.

What happens when your utilization ratio goes out of whack?

It is possible that if your balance is too high on too many of your credit cards, you end up with a high credit utilization ratio. This will cause your credit score to fluctuate negatively.

You may be wondering what is considered a high utilization ratio by credit card companies and by financial advisors.

A high utilization ratio is pretty much any ratio over 1/3, or 33%. A low credit utilization ratio is ideal in terms of contributing to a high credit score. A low credit utilization ratio is considered anywhere under 1/3 for example, 20%, 15%, or 10%, which are all considered low and healthy credit utilization ratios.

A high credit utilization ratio can lower your credit score significantly over time, which is not desirable. If you have a high credit utilization ratio over a long period of time, it signifies to lenders that you may not be reliable in paying back the money that you borrowed a timely manner. Or that you do not practice responsible spending habits in general.

However, if you have a high credit utilization ratio in the short-term, it probably have a bad affect on your credit score. This is especially true if you pay off the full balance of your credit card before the end of the monthly billing cycle.

If you put a lot of money on a credit card all at once, and then pay it off before the billing cycle changes over, it should not have an effect on your credit utilization ratio at all.

The only time it can affect your credit score is if you are carrying over a balance month to month, therefore it is appearing on your monthly statements which are seen by credit reporting agencies.

Long Term affects on your credit score with a high credit utilization ratio

In general, having a high credit utilization ratio will have the biggest impact on your credit score over a longer period of time.

A high credit utilization ratio will lower your credit score consistently over time, and these impacts can add up in the long run.

Here are 11 things your credit utilization ratio can be impacted by:

• As discussed above, your credit card balance is the biggest influencing factor which goes into determining the credit utilization ratio.
• Car Loan- A car loan impacts your credit utilization ratio by increasing both the available credit and the credit being used. As you pay off the loan, you have more available credit and less being utilized, so it improves your utilization ratio. Pretty much the same concept goes for paying off any loan: it will improve your credit score.
• A mortgage is also something which can impact your credit utilization ratio. If you have a mortgage, it means that you were taking out a loan for a portion of your home. The amount of the mortgage contributes towards your available credit. As you pay it off each month, that means there’s less of the available credit being utilized. However, the available credit is still the same, thus decreasing your utilization ratio, similarly to paying off a car loan.
• You might think that student loans are a major detriment to your credit score, but so long as you’re paying off the required balance each month, paying your student loans can actually improve your credit history. Because most student loans are in such huge quantities, that vastly increases your available credit amount. That means if you’re putting a lot of money on a credit card, it has proportionally less impact than it would have if you did not have student loans.
• Business credit cards also influence credit utilization ratio. Even if the card is for business purposes, so long as it is in your name, it will be counted towards your utilization ratio.
• Credit cards with very high credit limits are usually a great influence on your credit utilization ratio. As long as you’re not using a lot of the balance on it, a high credit limit means that you have a lot of available credit. So long as you do not use a lot of it, it will help keep your credit utilization ratio very low.
• Personal loans, similar to mortgage or car loans, can have a significant and strong influence on your credit utilization ratio. If you take out a large personal loan, you’re increasing both your available credit and your credit being utilized. That means that it could sway your credit utilization ratio either way, either making it lower or higher.
• HELOCS (home equity lines) will either impact your utilization ratio positively or negatively.
• Increasing or decreasing the number of authorized users on an account or opening a joint account will also impact your utilization ratio. This is because it will increase or decrease your amount of available credit, thus changing the ratio.
• The total number of accounts with outstanding debt also has an impact.
• The total amount of debt still owed to lenders is a major portion of the ratio, similarly to your credit card balance.

All of the above factors do not have an equal impact.

Revolving credit has proportionally an 85% impact on the ratio, while installment loans proportionally only have a 15% impact.

The reason behind this is simple:

FICO doesn’t treat all different types of accounts equally. For example, a student loan and a credit card are considered very different types of debt and come into play with different impacts. Credit cards are revolving debt, and they tend to have a lot of variation in their balances.

These are the most crucial type of debt in determining the utilization ratio. In other words, keep your credit card balance low to keep your ratio low.

Having a huge student loan or mortgage doesn’t matter so much, unless you aren’t making the required regular monthly payments. It takes longer to see the benefits of making regular payments on installment loans.

In the category of amounts owed, credit card debt is much more important. It has the biggest impact on your utilization ratio.

But, it can also do the most damage to your credit score if the ratio is high, or if you don’t make timely payments.

Closing unused or unwanted credit cards can improve your credit score, even though it can increase your utilization ratio. However, be careful not to get rid of your available credit too quickly.  Luckily, the ratio is not all that determines your credit score.

Here’s how credit score is determined outside of Utilization Ratio

1. Payment History
2. New Credit
3. Length of Credit History
4. Type of Credit

This concludes part 1 of 5 on how credit score is determined and why it’s so important for you, an American financial consumer, to understand this.

Click here to go to part 2

The post How Credit Score Is Determined Part 1 – Utilization Ratio appeared first on National Credit Federation.

It’s an important question to ask.

If you’ve got student loans, you’ll want to know what impact they have on your FICO score and how they’ll affect your life moving forward.

I’m doing this, of course, because student loans is a hot topic.

According to the Wall Street Journal more than 3,000 people a day default on their student loans…

That’s more than 1,000,000 people in default.

That’s a big number.
And it’s only growing.

Check out this graph on the amount of debt the average student has upon graduating.

This means one thing. People are graduating with an insane amount of debt.

And it’s no wonder they are defaulting.

According to this, the average student has more than $35,000 in debt before they even have their first job.

That’s a payment of $300-$400 a month.
That’s a big expense when you are just starting out.

Imagine graduating college, looking for a job, and having to make that payment.

How can you make investments?
How can you save any money?

Many can’t buy a house because of student loans.
They remain stuck in an apartment or moving back in with their parents.

That’s one of the reasons home ownership is the lowest it’s been in 60 years…

Here are 5 ways college loans will affect your credit score.

1. Student Loans Usually Start Your Credit Profile

In 2009 congress passed the Credit CARD Act.

This put the brakes on credit card use for college students.

Anyone under 21 years olds cannot get a credit card unless they have an adult co-signer OR unless they can prove they have sufficient income to cover bills.

What does this mean?

Well when you go to college, you’re likely to borrow money from the federal government to pay for that education.

They give you money in the form of a student loan.

When do student loans show up on credit report profiles?

Immediately upon issuing your student loan, you now are in debt to Uncle Sam.

And the government tracks it and reports it to the 3 credit bureaus:

• Experian
• Equifax
• TransUnion

Your credit profile is opened and you’re issued a numerical score called a FICO score.

A student loan “tradeline” will be placed on your credit profile in the form of an installment loan.

So for many, this is the first financial activity tracked.

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2. The “Amounts Owed” Portion Of Your Credit Score Is Impacted

Your FICO profile is broken down including the 5 areas with the weight associated with each:

The amounts owed portion holds a weight of 30% of your overall credit score.

When you borrow money your score typically falls immediately.

The reason for this is you’ve taken on new debt and there is no payment history.

So lenders don’t know whether or not you have the ability to pay on that loan until you prove it by making timely payments.

There’s no history.

Let’s say you graduate college with $35,000 in student loans without ever making a payment.

After your grace period, the lender requires payments to start.

That whole time your in college accumulating debt, it’s adding the amounts owed factor of your credit profile, which you cannot be rewarded for until you payoff.

Adding in a credit card in early college years and paying every month and help offset this.

3. Student Loans Add To The Mix Of Tradelines

Your FICO score uses the different types of debt to make up your score.

You’ll want to have a healthy mix of:

1. Revolving Accounts (credit cards, home equity lines of credit)
2. Installment Accounts (mortgages, auto loans, student loans, home equity loans)

While every type of debt can fall into one of these account types, each has a different impact on your score.

For instance, mortgages have a different impact than student loans even though they are both installment accounts.

Finding the right mix to get the best scores can be tough.

As a rule of thumb, it’s best to have 3-5 revolving accounts and two installment loans in your credit profile, not including your mortgage.

Here’s a good example of a healthy mix:

1. VISA – $1,500 Limit
2. Mortgage – $150,000
3. Discover – $750 Limit
4. Student Loans – $30,000
5. Macy’s Store Card – $1,000
6. Auto Loan – $15,000

You’ll want to consider is the minimum payment required on these cards.

If you’re making $30,000 a year that’s $2,500 a month.

So between your mortgage, gas, electric, food, auto, $2,500 a month gets eaten up pretty quick.

Managing this every month is important.

It shows lenders you can handle a wide variety of debt and your student loan payment is part of that mix.

4. Missing A Payment On Your Student Loans Will Affect Your Credit Score.

This is called defaulting on your loan.
It’s impact on your credit score is substantial.

Often times, many people think they can make up their payment the following month or down the road and it won’t affect their credit score.

The truth is, every time you’re 30 days late on a payment, your student loan servicer will notify the credit bureaus.

Missing just one payment can cause a good credit score to drop 100 points.

That’s a big drop.

If you are 120 days late, they could send your account into collections.

If you’re in default of your student loans, there’s a great article from our friends at The US Student Loan Center titled how to get student loans out of default.

I encourage you to check it out.

Again, your credit score has 5 parts to it:

1. Payment History 35%
2. Amounts Owed 30%
3. Length of Credit History 15%
4. Credit Mix 10%
5. New Credit 10%

When you default on your student loans, it affects #1 and #2.

When you miss a payment on your student loans, your payment history is affected.

Because you typically have limited credit history at this point, it has a major impact.

It shows lenders you are having a tough time handling your debt.

You now become a “lending risk” in their eyes.

Another thing to watch out for are fees for missing payments.

Your student loan servicers can attach fees for late pays which will increase the amount owed portion of you credit profile.

It’s a nasty double whammy.

Before you make the decision to miss a payment on your student loans, consider the lasting affects it has on your credit profile.

A late payment can affect your credit for years and you’ll pay via higher interest charges over time.

That, right there, is the #1 way student loans will affect your credit profile.

5. Uncle Sam Won’t Play Nice If You’re Not Careful

First things first: The department of education is a collection agency.

Not in the traditional form, but they collect.

And they are vicious.

The Department of Education can sue student loan borrowers in an effort to collect.

And there’s no statute of limitations, meaning they can collect forever…

They can also use whatever assets you have to ensure repayment.

This includes:

• Garnishing your wages
• Seizing your bank accounts
• Taking possession of valuables
• Placing a lien on your home.

Should this happen, not only are you in collections, but you can have a judgement place on you, resulting in a public record.

So here’s the full picture:

1. Your credit history shows non payment
2. You increase the amounts owed part of your credit profile because of fees and interest
3. Your wages are garnished (meaning your employer pays 15% of your check to the government. You never even see it)
4. You have a collection account placed on your credit
5. You have a public record in the form of a judgement on your credit

That can ruin your credit score for more than a decade.

Conclusion

Student loan debt is out of control.
It’s a bubble destined to burst sometime in the future.

Over 1 Trillion in debt and millions of people in default.

It’s not pretty.

If you have student loans, you’ll want to understand everything detailed out here.

I get the fact most people are living their life and don’t stop to consider the consequences of borrowing money.

But after graduating, that bill comes due.

And when it does, the way you handle your student loan payment will affect  your credit score in a big way.

The impact it has up to you:

Can’t get a mortgage because of student loans?
Can’t rent an apartment?
Stuck living at home even though you’ve got a 4 year degree?

Make sure you don’t fall into the student loan trap so many others do. Consider your options, be smart about your finances, and pay them off as soon as possible.

The post 5 Ways Student Loans Affect Credit Score appeared first on National Credit Federation.