A credit report is like a thermometer.  It reflects a credit profile at a point in time.  Depending upon your credit history it may contain both a positive side and a negative side.  In order to significantly improve or maintain a credit score, both sides must be dealt with equally.

Your credit profile is designed to be a measure of your credit worthiness. 

However, it is just as much a measure of you continuing relationship with the major financial institutions as well as your non financial creditors.

So I get a call from successful high end car dealer who says he needs help with his credit. Business or personal, I said, personal he responds.  We pull his credit report and his scores range from the high 5’s to the low 6’s.  Reviewing his trade lines I immediately notice that he has a high debt ratio.  Looking further I notice that most of the problem stems from credit cards and revolving charge accounts.  He also has a large mortgage and some secured loans but they were older and had a good payment history.

As soon as I brought up the subject of the credit and charge cards his immediate response was “my wife”. There were six or seven credit cards and an equal number of revolving charge cards on the list and all of them carried a high balance.  All of the cards were in both names so they both had equal access to all of the credit. 

She can’t leave a store, he said, without buying something for my kids. They have so much stuff lying around it’s ridiculous.  I try to keep the balances low but she just keeps running them up again.  Maybe I should get a divorce, he said, jokingly.

That might not help you, I said, depending upon the financial settlement you agree on. 

The best solution for you in that case would be to pay off all the existing accounts and close them. Then open new accounts in your name only. It may affect your score for a while because you are trading old accounts for new ones, but eventually you score would improve.  That’s as much help as I can give you, I said, you’ll have to take it from there.

The car dealer’s goal was to get is score up to the 700’s.  If his wife continued to use their credit cards at the same rate he was fighting a losing battle.  Why??

Here is a guideline you can use to determine your debt ratio on credit cards and the number of points it is subtracting from your FICO score.

Disclaimer:  Don’t hold us to these numbers.  The exact deductions form your scores depends upon your total credit profile and your overall payment history.

 

Use of Credit / Revolving – (Credit Cards)

How the ratio of your current balance to your credit limit affects your score.

                       ————————————————————–

 

0 %  –  25%  —    2 points                          26%  –  35%     —   10 points

36%  –  50%      20 points                         51%  –   70%     —   25 points

71%  –  75%       30 points                         76%  –   90%     —  35 points

91%  – 100%      40 points                         101% +              — 50 points

 

The average balance on the car dealer’s credit cards was fifty percent so 20×6 =120 points deducted from his score.  Add the deductions for the total debt ratio and he was on a constant credit treadmill.

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