In a broad sense, the concept of Amounts owed refers to the total debt you carry. However, the significance of your debt amount to your credit score lies more in your credit utilization. When a high percentage of your available credit is being utilized, it suggests that you may be overextended and more likely to make late or missed payments.
The amount of debt you owe on your accounts contributes to 30% of your FICO® Score
Research conducted by FICO indicates that your debt level is indicative of your future credit performance, as it can impact your ability to make timely payments on all your monthly credit obligations. Having debt doesn’t automatically classify you as a high-risk borrower, but as your balances increase, the likelihood of facing difficulties in meeting monthly payments on time also increases. However, this is just one aspect of how your credit score is determined.
Scoring algorithms consider various factors to determine the threshold at which your debt becomes excessive for your specific credit profile. Your FICO Scores take these factors into account.
The Amounts Owed Category considers five factors:
- The total amount owed on all accounts:
It’s important to note that even if you pay off your credit cards in full every month, your credit report may still show a balance on those cards. Typically, the total balance on your latest statement is what will be reflected in your credit report. - The amount owed on different types of accounts:
Apart from the overall amount you owe, your FICO Scores also take into account the specific amount owed on different types of accounts, such as credit cards versus installment loans. - The number of accounts with balances:
Having a larger number of accounts with outstanding balances can indicate a higher risk of overextension. - The proportion of balances to credit limits on revolving accounts:
This factor considers the ratio between the balances you owe and the credit limits on your revolving accounts, such as credit cards. Utilizing a high percentage of your available credit may negatively impact your credit scores. - The proportion of loan balances to original loan amounts:
For installment loans, such as mortgages or auto loans, this factor looks at the proportion between your remaining loan balances and the original loan amounts. Higher balances relative to the original loan amounts can affect your creditworthiness.
Understanding and managing these factors within the Amounts Owed Category can help you maintain a healthy credit profile.
The credit utilization ratio on revolving accounts
Is a crucial factor in determining your FICO Scores. It represents the percentage of your available credit that you are currently using. Maintaining a high credit utilization ratio, where you are close to maxing out your credit cards, can negatively impact your FICO Scores.
Conversely, having a low credit utilization ratio can have a positive effect. Sometimes, having a low ratio can be more advantageous for your FICO Scores than not utilizing any of your available credit.
It’s important to understand that the balance shown on your credit report may not necessarily be your current account balance. Instead, it reflects the balance reported by your lender to the credit bureau, usually the balance from your most recent monthly statement. Even if you pay off your credit card balances in full each month, your credit report may not show a balance of $0.
The remaining balance on installment loans in relation to the original loan amount
Is significant in assessing your credit. For instance, if you obtained a $10,000 car loan and have repaid $2,000, you still owe more than 80% of the initial loan amount, including interest. Making progress in paying down installment loans demonstrates your ability and commitment to handling and settling debt responsibly.
The amount of debt you owe plays a crucial role in your credit profile and constitutes 30% of your FICO Score. It’s essential to monitor your debt levels and manage your credit utilization effectively.
