One of the number one biggest factors in credit scoring, more accurately known as FICO scoring, is called the Balance to Limit Ratio. The Balance to Limit Ratio is a calculation (done by the Fair Isaac Corporation) to determine whether you are using your money wisely. It is determined based on your credit history and current credit accounts and decides whether or not you are a “smart” consumer. The better your Balance to Limit Ratio the better your FICO scores will be.

So, what exactly does this mean for the average consumer? It means you should be showing access to more credit than to debt.

For example, lets say you have a car loan for $20,000 and no credit cards. Your credit is now showing you have debt but you have no access to credit. Your Balance to Limit Ratio will prevent you from building your FICO scores and will stop you from obtaining a loan.

Second example, you have no car loan and two credit cards. You are now showing no debt and access to credit.  Your FICO scores should reflect this finding and reward you with points. But, lets be realistic… who has no debt?

Ideally, if you have auto loan debt and student loan debt you should be showing access to credit cards with limits at a minimum of $10,000 combined access.

Mortgage lenders will tell you that you must get your balances below 50%. This will allow you to purchase a home. If your balances are below 30% you scores should reflect in a positive manner. If your balances are at 8% of the limit your FICO scores will reflect at the highest level for your personal credit history.

One thing you need to remember from this article? You must have open credit cards. You cannot be approved for a loan without them.