A key part of each person’s FICO score, is the amount of access they have to open lines of credit, and how much they utilize that credit. For example, if I have access to $20,000 of credit, and I’m only using $5,000 of it, that’s good. The credit scoring algorithm
from FICO would figure my “utilization” as 25%.

However, if I close two credit cards at $6000 each so I’m not tempted to use them, now I only have access to $8000 dollars, but my balance may still be $5000. This is bad. Now the FICO algorithm says that my “utilization” is 62.5%. As a result, my credit score will likely drop, sometimes significantly, and now my credit card company can RAISE my interest rate because I’m perceived as a bigger risk, even though I’m trying to manage my credit wisely.

Here are a couple of generalities that we coach people on to have the highest scores possible. First, keep your credit lines open and use a minimum of 7% of the available line at least one time per year. Second, NEVER, if it can be helped, use more than 1/3 of your limit on any open line of credit. And finally, if you can, make multiple payments to your credit lines each month (total of payments must equal your “minimum payment due).

Of course, make sure that you have a plan.

Great thoughts MoneyMinding.

Travis Mitchell
Founder
Debt Free Project
http://www.debtfreeproject.com