Updated on 07.25.16

You Can Improve This Part of Your Credit Score Almost Immediately

John Ulzheimer

How you manage your debt has a huge impact on your credit scores. The good news is, you can change it quickly.

Last week, we discussed how the way you pay (or don’t pay) your bills has the single biggest impact on your FICO and VantageScore credit scores. A close second, however, is how well or poorly you manage your debt.

What’s more, the metrics that make up the “debt” category of your credit scores are much more actionable — meaning you can control how well you perform in this category, as long as you follow some basic rules.

How Much Does What You Owe Matter?

“Debt burden” accounts for roughly a third of the points in the credit score metrics used by FICO and VantageScore, making it the second most influential factor in your credit score. In fact, it’s almost as important as whether or not you’re making payments on time.

As a result, even if you make every single payment on time and have no negative information on your credit reports, your credit scores will never be truly great if you’re carrying too much credit card debt.

Exactly Which Information Is Relevant?

The primary metrics within the debt burden category are as follows:

  • How much do you owe on each account?
  • How many of your accounts have balances?
  • How much of each credit card limit is being used in the form of a balance?

The most influential of all of the debt-related measurements is what’s formally referred to as revolving utilization, which is a fancy way of saying how much you owe on your credit cards relative to the credit limits.

The utilization ratio is calculated by dividing the balances on your credit cards by the credit limits on your credit cards. So if you have two credit cards, one with a $2,000 limit and another with an $8,000 limit, and your combined balance between the two cards is $2,500, your utilization ratio is 25%.

How Much Will a High Utilization Ratio Hurt Your Credit Score?

Credit scoring models consider many factors in addition to your utilization rate. However, all things remaining constant, a higher ratio will always result in a lower credit score.

How much lower depends on a variety of factors, including just how high your credit card balances are and how many of the accounts on your credit report have a balance. In extreme cases, a high utilization ratio can lower your score by dozens of points.

How Long Will a High Utilization Ratio Hurt You Credit Score?

Currently neither the FICO nor VantageScore credit scoring models have a “memory” when it comes to your utilization ratios — meaning just because your cards were maxed out last month or last year, doesn’t mean it will hurt your scores if you’ve since paid down off your balances.

Scoring systems only consider what’s on your credit report as of the next time a company pulls it – and, with it, a new credit score. If you apply for a loan today, then the lender is going to pull a credit report and a credit score today.

This is good news for you — because if you’ve been able to pay down or pay off your credit card debt, then your scores will reflect that information and you won’t be penalized simply because you used to have high balances at some time in the past.

So, the answer to the question “How long it will hurt your score?” is this: As long as it takes you to pay down your debts.

If it takes you years to pay down your credit card debt, then it will take years for your scores to recover from the higher balances. But if you’re able to write a big check and pay off your credit cards in one day, then your scores will recover just as soon as your credit card issuers update your credit reports accordingly.

What Should I Do to Improve My Credit Score?

If you’re able to pay down your credit cards while eliminating some balances entirely, then your credit scores will begin to improve almost immediately.

Choose accounts that have lower balances, sometimes referred to as “nuisance” balances, and pay them off first, as this will help improve your credit scores immediately.

The next step is working down the larger balances, which is likely to take some time. That’s the bad news.

The good news is, even if it takes you a while to pay down those larger debts, your revolving utilization ratio will go down as you do. A utilization ratio of 50% is still better than 75%, and 25% is better than 50%. The lower, the better.

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