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Capacity is King… When it Comes to Your Credit Score

Your credit score is a calculated number that represents your creditworthiness. It’s a powerful number that can be used to make decisions on what you are offered for products like loans and credit cards, a house or apartment, insurance policies, even a cell phone. The higher the credit score, the better your offers for loans and deals will be. Building and maintaining positive credit will save you money and give you peace of mind knowing you have the ability to access funds when you need them most.

Several factors influence your credit score. We all know it’s important to pay your bills on time and have good payment history on accounts, and it’s with good reason to do so, because payment history makes up 35% of your credit score. But did you know the second most important piece of your credit score, equaling about 30% of your calculated score, is how much debt you owe? The term for this important component of your score is called Capacity. Capacity takes a look at your available credit compared to the balances you owe. The higher the capacity you have, the higher the credit score.

Let’s review a good example of how capacity can impact you.

Member #1 has 5 credit cards with $50,000 total in limits and owes $10,000 in balances across those cards. That leaves member #1 with $40,000 in credit availability – the member has balances on 20% of available limits, which leaves the member’s capacity high at 80%.

Member #2 has two credit cards with $5,000 total in limits. Member #2 owes $5,000 in balances on those cards. That means member #2 has no availability, aka no capacity, to take on additional debt on those cards. $0 availability means 0% capacity.

So which member is in a better financial position and would have the higher credit score? The answer is member #1 – this member has good capacity to take on additional debt. Having capacity shows lenders and the credit bureaus that you have the ability to take on additional debt but have the willpower to choose not to. Again, the higher the capacity, the better the credit score. A good rule of thumb is to only ever use up to 50% of the available credit lines you have. That will keep your capacity at or above 50% and keep your credit score in a good position.

Your financial health is just as important as your physical health. Dutch Point Credit Union’s personalized credit review program allows you to get an annual check-up on your financial fitness. You’ll get a line by line consultation of your credit history and walk away with advice on how to maintain your credit score or improve it if needed. Learn more and sign up for your personalized credit review today.

You can also gain free access to your credit report, credit score, and personalized money-saving offers within Digital Banking thanks to SavvyMoney! Simply log in and click on My Credit Score in the navigation menu to get started.

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