When trying to figure out how to boost your credit scores, the question of whether opening new lines of credit can help or not can be confusing. From what I have seen, to have great credit scores, you don’t necessarily need a lot of accounts open to obtain 700-plus scores.
The thing that your credit most depends on is your credit utilization ratio. So, if you have $10,000 worth of credit cards, and you have borrowed $4,000 against, even if you pay the cards off every month, your utilization ratio would show at 40 percent.
The general rule of thumb has always been to keep your utilization ratio at less than 30 percent. However, it seems that the credit bureaus have added an additional score increase if your utilization ratio shows at less than 10 percent.
According to www.experian.com, to get an accurate depiction of what your total utilization ratio is, “Pull all your credit card statements from the last year, add up the monthly statement balances and divide by 12. That should give you an idea of how much you typically charge each month. Note that if there are months when your balance is extra high, your credit score will take a hit if your limits are not high enough to maintain a ratio of under 30 percent.
“Then, you'll want to check the credit limits on all your credit cards and add them up. If your total credit limit is more than 10 times your average monthly balance, you don't need to worry. You have enough credit to maintain good credit scores. If that's not the case, you may want to consider applying for a new credit card or request a credit limit increase on existing cards until you reach the ideal credit utilization ratio. Because you won't necessarily know what credit limit you will get when you open a new card, it might take a few attempts to achieve your perfect credit limit.”
Now, I do not suggest applying for more and more credit cards/limit increases, just to improve your utilization ratio. My recommendation is to use as little credit as possible each month. If you can keep your utilization ratio at or below 10 percent with the credit that you already have open, I strongly suggest doing this. A $200 credit card and a $20,000 credit card affect your scores the same way if you utilize the same percentage on them.
Alex Giampietro, loan officer NMLS ID 881299, BR NMLS 1273681, AZBK 0907366, can be reached at Sunstreet Mortgage at 928-362-5998.