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Available Credit

Available credit is the second most important scoring category, representing 30 percent, or 255 possible points for your score. Available credit is defined as the percentage of current balances compared to current credit limits assigned to those accounts.

For example, if you have a credit card with a credit limit of $1,000 and a balance of $700, then the available credit will be 30 percent. If you have a credit limit of $1,000 and a balance of $300, then your available credit will be 70 percent.

The magical number is 70 percent to optimize this part of your credit score. This also puts to rest the myth that it's best for consumers to close out credit accounts they no longer need nor use. Although that may have been a prudent gesture 20 years ago, closing unused accounts can actually harm a credit score instead of helping.

Here's the thinking: To determine prudent credit patterns, you need to borrow money. How would a lender determine your ability and willingness to pay them back if you've never borrowed before? That's why credit scoring puts a high emphasis on carrying a small balance relative to one's available credit. If you have old credit accounts with no balances, it may not look good. If you want to optimize your credit score, you should keep your balances to around 30 percent of your available credit.

Let's look at an example. Say you have three credit cards, each with a $10,000 limit, giving you a $30,000 credit line. If you have a zero balance on all three cards, your credit score won't improve. But if you buy a car with one of those cards and now have a $10,000 balance, your score will begin to improve because your balance is now 30 percent of your available credit.

On the other hand, once you begin to reach your credit limit, your score will begin to deteriorate. When your balances approach 50 percent of your available credit on a regular basis, your scores will begin to drop. Worse, if your balances actually exceed your credit limits your scores will drop even further.

Now let's say you have those three credit accounts — each with a $10,000 limit and a $10,000 balance. If you cancelled one of those cards, you would have a $20,000 limit with a $10,000 balance, or 50 percent available. Your scores would not improve and might begin to fall. If you cancelled the second account, you would have a $10,000 limit and a $10,000 balance and your scores will fall.

If s also important to note that if you have an open account you must occasionally use the account or the credit history won't be counted; it will become “dormanf in the eyes of the scoring model. If your goal is to obtain the highest score possible, you'll need to use one of these credit accounts every so often to include the account's history in your credit score.

You can also hurt your score when any single account hits its limit, regardless of other available credit. This can come into play when you receive a credit card offer in the mail that wants you to transfer all your old balances to its zero-interest credit card.

Makes sense, doesn't it? Open up a new account and transfer all your old balances into a new one with no interest? Who cares if if s only for a year? Think of the money you'll save!

Guess what? If you transfer all your balances, you'd better make sure your new zero-interest account leaves you with at least 50 percent of available credit. Otherwise your score will be damaged if you transfer $30,000 into a new credit card with a $30,000 limit.

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