Excess debt is an important factor in calculating a credit score, but it is not the only consideration. Three credit reporting agencies maintain credit file information; each agency uses a different model to calculate a credit score. How much having excess debt will lower your credit score is calculated in percentages and factored into the overall credit rating.
Definition
A credit score is a three-digit number that reflects a person's credit worthiness at a specific point in time. Potential lenders, banks, insurance agencies and employers use credit scores to determine whether an individual qualifies for a loan, receives overdraft protection on a bank account, gets a job and the rate of his insurance premiums.
Factors
Several factors impact a credit score, including payment history, public records, new credit accounts, credit inquiries, types of credit, length of credit history and the amount of outstanding debt. Of these factors, payment history plays the largest role, 35 percent, and the amount of outstanding debt is a close second at 30 percent, according to myFICO.com.
Calculation
The outstanding debt factor of the overall credit score is calculated as a credit-to-debt ratio. To calculate a credit-to-debt ratio, divide the total amount of outstanding debt by the total amount of credit available. For example, if you owe $4,500 in credit card debt and have $8,000 in available credit, your credit-to-debt ratio is 56 percent. A debt load in excess of 50 percent will increasingly lower your credit score.
Options
The credit-to-debt ratio includes all of available credit listed on the credit report. Old credit accounts in good standing with zero balances are part of the available credit portion of the calculation. The fact that there is no outstanding balance on the account is a positive factor in your credit score calculation. Closing old credit accounts will lower your available credit and increase your credit-to-debt ratio. Leave old accounts open; not only do they figure into the outstanding debt portion of your score, they are part of the credit history factor that makes up 15 percent of your score.
Conclusion
Excess debt from revolving accounts and installment loans can lower your credit score. How much it will lower your score depends on the other factors involved in the calculation. The closer your outstanding debt is to your available credit, the lower your credit score will be. Keep your credit-to-debt ratio lower than 50 percent to lessen the impact on your credit score.
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