One of the best ways to improve your credit score is to do a balance transfer and/or request a credit limit increase. Most experts agree that total balances on revolving accounts should be kept to no more than 30% of total limits. A balance on any one account should not exceed 50% of that card’s limit.
If you exceed either of these suggested debt ratios, the best way to solve the problem is to do a balance transfer. If you have three charge cards, each with $5,000 limits along with a balance on one card of $4,000, the total debt ratio is 26% ($4,000/$15,000). However, the debt ratio on the card carrying the balance is 80% ($4,000/$5,000). Transfer part of the balance — $2,000, for example — to another card. The transfer results in the same total debt ratio — 26% ($4,000/$15,000). Fortunately, the individual card balances have been reduced to 40% ($2,000/$5,000) of total lines. In this situation, a simple balance transfer should boost your score.
If you cannot achieve the optimal debt ratios by transferring balances, requesting a credit line increase might do the trick. Let’s pretend that you have one VISA and one American Express, each with $5,000 lines. Having run up $4,000 on your VISA, the percentage used is 80% ($4,000/$5,000). Nothing is owed on the American Express. In this scenario, even if you did a balance transfer, the overall debt ratio is still 40% ($4,000/$10,000), in excess of the desired 30% balance to limits quotient. The solution here is to pick up the phone and request that your limits be raised. This is a standard request and should be granted if you have paid your bills in a timely manner and have not recently made a similar request. Once your limits have been raised, you can reassess the situation and do a balance transfer to achieve the optimal debt ratios.
If you still cannot make the numbers work after requesting credit line increases, the remaining option is to apply for an additional card. Unfortunately, applying for new credit can have a negative impact on your rating. Amount owed contributes 30% to score whereas new credit accounts for only 10% of score. Based on those percentages, the benefit gained from the addition of a new piece of plastic to which a balance can be transferred should offset the negative of applying for a new card. If you feel confident that your application will be approved, the good should outweigh the bad, but do so at your own risk.
Copyright © 2008 Wade Young.