Increase Credit Limit

Increase your credit limit to increase your credit score

How Is Credit Score Calculated

Share This

Your credit score could be one of the most important numbers in your life. It will be used by creditors to determine how worthy you may be of getting a loan for a mortgage, car, or anything else. Even though it is important, a lot of people don’t know what goes into actually calculating it.

While the exact formula for the FICO score is not given (which is why you could not necessarily figure it out on your own), there are percentages given for what pieces of data factor into the score.There are five categories, even weighted differently:

35 percent = payment history
30 percent = amounts owed
15 percent = length of credit history
10 percent = new credit
10 percent = types of credit used

When taking a closer look at the “amounts owed” category, we can see why it may be beneficial to increase your credit limit. From the MyFico site:

However, when a high percentage of a person’s available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.

The other way to put it is that you would like your credit utilization rate to be low. One way, obviously, to do that is to pay down your credit card, mortgage, or whatever is getting close to its balance. Another way is to make the amount that you can spend or borrow higher, which can achieve the same effect. Let’s lay it out in numbers:

If you have a credit limit of $2,000, and a balance of $1,000, your credit utilization rate will be 50%.
1,000 / 2,000 = 50%

Let’s say that you wanted to get rate down to 25%, you could pay $500. That would make your balance $500, with a limit of $2,000.
500 / 2,000 = 25%

However, let’s say that you don’t have to cash on hand to pay down $500. The other way to go about improving your utilization would be to increase that limit amount. If that increased to $4,000, with the same balance, that would be a 25 percent utilization rate.
1,000 / 4,000 = 25%

Since that can be a key factor in your credit score, you will want that percentage as low as possible, which is one big reason why people increase their credit limit.

,

2 Responses to “How Is Credit Score Calculated”

Leave a Reply

Your email address will not be published. Required fields are marked *