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One of the best ways to improve your credit score is to request a balance transfer and/or a credit limit increase. Most experts agree that the total balance on revolving accounts should not be maintained more than 30% of the total limit. The balance on any one account should not exceed 50% of the limit on that card.
If you exceed any of these suggested debt ratios, the best way to solve the problem is with a balance transfer. If you have three charge cards with a limit of $5,000 each 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 with 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 personal card balance is reduced to 40% ($2,000/$5,000) of the total lines. In this case, a simple balance transfer can increase your score.
If you can’t get the optimal debt ratio by transferring balances, requesting a credit line increase may do the trick. Let’s say you have a Visa and an American Express, each with $5,000 lines. After $4,000 is spent on your visa, the percentage used is 80% ($4,000/$5,000). Nothing is owed to American Express. In this scenario, even though you transferred the balance, the overall loan-in ratio is still 40% ($4,000/$10,000), higher than the desired 30% balance. The solution here is to pick up the phone and request that your limits be increased. This is a standard request and should be accepted if you have paid your bills on time and have not made any such request recently. Once your limits are stretched, you can reassess the position and transfer the balance to get the optimum loan to debt ratio.
If you still can’t make the numbers work after requesting a credit line increase, the remaining option is to apply for an additional card. Unfortunately, applying for new credit can have a negative impact on your rating. The outstanding amount contributes 30% to the score whereas the new credit accounts for only 10% of the score. Based on those percentages, the benefit gained from adding a new piece of plastic to which a balance can be transferred should offset the negative of applying for a new card. If you’re confident that your application will be approved, the good should outweigh the bad, but do so at your own risk.
Copyright © 2008 Wade Young.
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