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Credit Improvement: Manage Your Debt Part 1

As an adult, you know it is your job to manage your debt.  It is important to the security of your family and your continued financial survival that you do so.  Along with managing your debt directly, how your debt is viewed by financial entities is important as well.  Your credit report is the primary tool that credit card companies, banks, insurance companies and other look at your debt to determine if you are eligible for additional credit.  When credit bureaus evaluate your debt, the measurement system that is used has a lot of impact on how your debt impacts your credit score.

Measuring Debt: Total Debt and Number of Accounts

There is a value that is just as important to those you look at your credit report as it is to you and that is the total amount of debt you are carrying.  This is often called your aggregate debt.  That final number includes how much you owe on your home, your auto loan and all of your credit accounts as well.

In addition to total debt, how many active credit accounts is a value that is important to your credit score.  On your credit report, every type of credit account you are carrying including your mortgage, credit cards and other forms of debt will all be listed.  So if you have a mortgage, a second mortgage, a car loan and numerous credit cards, everyone who orders your credit report can look at those accounts and their balances.

Your Credit Usage

Along with the details about your individual accounts, lenders who are considering you for a new account look at how muck of your credit you are using and how frequently you are using your credit.  If you have 10 credit accounts and there is activity on each one of the every month, that is a very busy credit profile.  But even more important is how much of your available credit is being used.  This is called the “revolving utilization”.  The formula for computing this value is pretty straightforward.

• You start by looking at every credit account you have and noting your credit limit for each account.  Using a spreadsheet, list each and the draw a total.  This is how much credit you have available in total.

• Now you do the same thing with your current debt balance on each account.  In the next column of your spreadsheet, enter how much you owe on each account.  Now draw a total.  This is your total debt.

• When you have all that detail in one place, it is a simple task to compute a percentage of credit being used.  Simply divide the total debt by the total credit you have available and multiply by 100.  The percentage you see as a result is what lenders call your revolving utilization number.

This is a good exercise for you to go through.  You can do it without a credit report by using the statements you pay each month that will show your current balance and your credit limits.  Once you know that percentage, you can determine if it is too high and how to go about bringing it down.  It should be as low as you can get it for very good reasons.

Click here to see Part 2: Credit Improvement: Manage Your Debt Part 2

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