Amount Owed on Accounts is Too High |
By Kenneth Long on May 19, 2010
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This is one of many reasons why you have less than a perfect credit score. If your credit report lists this reason, then you may need to address one of the biggest impacts on your credit scores.
Your balances impact 30% of the credit scoring formula. Simply stated, the more you owe, the lower your score. It is a bit more complicated though in terms of what the individual effects are.
Some people incorrectly take this warning to mean that their debt-to-income ratio is too high. FICO credit scores ignore income.
The largest factor that contributes to this error is a high debt-to-credit limit ratio, also known as the credit utilization ratio. This means that you may be using a dangerous percentage of your overall credit. Credit experts often recommend using no more than 30% of your available credit on revolving accounts. According to FICO spokesperson Craig Watts, credit damage actually begins when your balances exceed 10% of your credit limits.
Installment accounts can also prompt a similar error. When installment loans are fairly new, you owe nearly the entire amount originally borrowed. The proportion of balances to the loan amount is initially 100% when an installment loan is first opened. Credit scoring formulas reward you when you have paid off significant portions of installment loans, but this could take years.
If you see this warning of high amounts owed on one of your credit reports, you should consider paying down your balances. When able, send a much higher payment to reduce your credit card balances. Extra payments on installment loans should be marked as "for principal payment only" to make sure the payments are allocated properly.
You may find that you have no additional money to send to your lenders. In fact, you may even be having trouble getting by as it is. If this is the case, consider credit counseling as a means for developing your budget, evaluating options for getting debt free and reducing interest rates on your debt.
Otherwise, the next time you apply for new credit, your lender may deny your request. Their response may easily be that the amount owed on your accounts is too high.
Join the Discussion at the Credit Forum: Amount owed on accounts is too high
The amount owed on accounts is too high serves as Code 1 on FICO scoring products and Code A3 on NextGen scoring. For more information about credit scoring, see the complete list of credit score factors.
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