The amount of money you owe accounts for about 30% of your credit score. Lenders look not only at the amount itself, but also at what type of credit it is. Clearly, an amount of $100,000 on a mortgage loan is not the same as owing the same amount on a credit card.
The average American uses only 30% of their available credit. Lenders use this as a comparison to understand your individual borrowing habits. Using too much of your available credit will raise a red flag with lenders.
Revolving Credit
In the case of revolving debt (credit card), the credit score formula looks at the difference between available credit and used credit. The less of available credit you use the more positively it will reflect on your credit score.
As we stated before, credit card companies report your credit usage to the credit bureaus on a regular basis (monthly, bi-monthly or quarterly). So if you have a habit of hitting the limit of your credit card every month, the reported total of your credit used will most likely be high. If does not matter that you pay off your bill in full every time, the amount you owe on the day of reporting to the bureaus, is the amount that will show up on your credit report.
If you want to have a good credit score, make sure to use only part of your available credit. A good rule of thumb would be to use only 30% or less of your available revolving credit limit.
Installment Loans
Auto Loans, mortgages, and other installment loans are a bit easier to manage. Lenders want to see one simple thing; they want to see that you have managed to pay down the loan over time. So make your payments and pay off your loans.
How Much You Owe