Help! My high balance is hurting my credit score

This was originally published on Monday, October 20, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My credit score is just above average. The reason for this is because of my high balance on my only credit card. I know I need to pay down the balance, but I have also heard there are other ways to improve my score such as closing my account or asking for a lower limit. Are there other ways to improve my score?

Answer: First, let me commend you on understanding what’s hurting your credit score. Many people don’t look at their credit score until they’re in dire straits. It seems that there’s a lot of advice floating around out there on the best ways to improve your credit score when it comes to credit cards. Some may help and others can be very detrimental. My best advice is good old-fashioned personal restraint from using it and paying off the balance. Here are some tips that I’ve heard and why they’re not feasible.

•  Closing a credit card. On your credit score, one of the most heavily weighed factors is your balance to credit limit ratio, or how much you owe. This category accounts for 30 percent of your score. Once you pay off a credit card and close it, the credit card issuer can decide if the history of the card remains on your credit score. If they decide to take the credit card off your report, you will lose the history that goes along with it. That would not help your score because credit history accounts for 15 percent of your credit score.

Since this is the only card you have, it might hurt you more than someone who has numerous credit cards. If the credit card issuer leaves the closed account on your report, the history will only stay for 10 years. An account that is open, even with little activity, can stay on your report as long as it stays open.

•  Requesting a lower credit limit. As I mentioned previously, one of the heaviest-weighed factors on your credit score is based on how much you owe. If you cannot pay down your debt but you lower your credit limit, you will increase your balance-to-credit-limit ratio. This would severely hurt your score.

• Opening new credit cards. Because your ratio of the amount you owe to the amount of available credit is so heavily weighed, you’d think that opening more cards to increase your limit would work. Yes, opening more cards will raise your credit limit, but opening more accounts all at once will hurt your score. Each time a credit card issuer opens an account for you, they will look at your credit score. These inquiries will actually lower your score. If you want to increase your credit limit by opening new cards, do so by spacing them out over a few years.

• Not using your card once you pay it off. Once again the ratio of indebtedness to credit limit plays a factor in this decision as well. You should use your card regularly, but in amounts that you can pay off the balance in full on the month it’s due. If there’s no activity within a certain period of time, your card issuer may close it.

• Checking your credit score regularly. When you check your credit score regularly, it won’t hurt your credit score. Inquiries from banks, loaning agencies and credit card issuers will. Credit lenders report to the credit bureaus every 30 days. It’s very smart to stay on top of your credit score.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

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