Credit Report: Things that Affect Your Credit Score

The way you handle credit limits on your accounts can affect your credit score. Credit limits can be lowered, increased or closed altogether depending on what you are trying to accomplish. When you open a new credit account this adds another credit limit to your credit report profile. Most people don't know how to effectively manage their credit limits in a manner that is beneficial to their credit scores. Once you understand how your credit score operates you can make adjustments.

Credit Usage

When a credit-card limit is lowered, so is your credit score. If you have a $5,000 limit on a card, and you charge $2,500, you are now using 50 percent of your available credit, assuming you had no previous balance. When your available credit usage gets to 30 percent or more it begins to have a negative impact on your credit score. This is a simplistic view which assumes you only have one credit card.

Closing Accounts

When you close one of your credit-card accounts because you paid it off, it can have the same impact as purchases. Say you have three credit cards with limits of $7,500 each, which adds up to $22,500 in available credit, assuming you have no balances. As soon as you close one of the accounts you reduce your available credit to $15,000. Your available credit use is now at 33 percent, ($7,500/$22,500), and your credit score will be impacted in a negative way.

New Accounts

If you open a new credit card account you are adding to your available credit and this can increase your score. However if you open too many new accounts in a short period of time your credit score will be lowered. Don't open credit accounts that you don't plan on using or don't want.

Increasing Credit Limits

There are a number of scenarios that can take place with your credit limits. If you have three credit cards with limits of $7,500, assuming they all have no balances, your available credit is $22,500. If you close one account your available credit is now $15,000, which is 33 percent usage. Now if you have the credit limit increased, on one of the remaining accounts, to $20,000 your total available credit is now $27,500, ($7,500 + $20,000). When you add the limit from the closed account your total limits are $35,000 but your available credit use is now 21 percent, ($7,500/$35,000). Increasing your credit limit actually reduced your credit usage from 33 percent to 21 percent which helps to increase your credit score.

Debt Owed

There are many factors that determine your credit score but the amount of debt you owe contributes to 30 percent of your credit score. That's why having a substantial amount of debt and using a significant amount of your available credit can be harmful to your credit score.

Source
http://www.myfico.com