What is your Debt to Credit Ratio?

Are you the kind of person who pays off all their credit card bills at the end of each month? You might be surprised to find out this actually has an adverse affect on your credit. Because lenders make money by charging interest, your credit score is derived by your ability to maintain a monthly balance and make payments over an extended time period. This actually demonstrates to lenders your true credit worthiness and will help raise your score if done correctly.

Lenders want to see that you can consistently over time maintain a balance and make monthly payments. This is what is considered good credit history and will improve your score over time. This only applies to revolving accounts like credit cards. If you have $10,000 in credit and are maintaining a $2500 balance, this would be a 25% ratio. Anything over 50% is considered too high and you will be considered a risk to the lender. In fact a 30-35% balance would be ideal to maintain to help improve your score.

Am I advocating that you keep 30-35% balance on your credit cards? Yes and no. A good strategy might be, if you are going to be in the market for an auto loan or mortgage loan (installment accounts), then you may want to position yourself with the right debt to credit ratio perhaps 3 to 4 months before applying for a new loan. This should be sufficient time to raise your credit score.

Remember, this is only one technique of many to improve your credit score found in the Credit Secrets Bible.