Why Is Revolving Utilization Considered in Your Credit Scores?
Your revolving utilization is an important consideration in your credit scores for one very simple and important reason: it is statistically predictive of higher credit risk. When you carry outstanding credit card debt on your credit reports you represent a higher credit risk than someone whose reports show paid off credit card balances.
All debt is not created equal. When you take out a mortgage loan or an auto loan, for example, you are opening an installment account. Credit cards, by comparison, are revolving accounts. Installment debt is much less risky for lenders to extend because the debt is generally secured by some sort of collateral (aka your house or your vehicle) which the lender can seize and resell in the event you stop making your payments. However, credit card debt is different.
Because of the nature of credit card debt, it is much more predictive of increased credit risk than installment debt. Think about it. If you begin to struggle financially due to an illness, divorce, job loss, or even poor financial management habits like overspending, which is the first obligation you will probably allow to slide in the event that you have more bills than money at the end of the month? Most likely you will not skip your mortgage payment, your rent, or your auto loan payment if you can help it. Credit card payments, however, are much more commonly skipped in the event of a financial shortage.
Additionally, increased credit card balances might indicate that a financial problem is looming. If a consumer loses his job then it is very common to rely upon credit cards to help finance every day expenses until a new source of income can be secured. As you can easily see, if your reports show that you are revolving balances on your credit cards from month to month, especially high balances when compared with your credit limits, it might make you appear to be a higher credit risk in the eyes of a lender.
The Good News
Although revolving unpaid credit card debt on your credit reports from month to month will almost certainly lower your credit scores, you can currently regain those lost points rather quickly, as soon as you start to eliminate the debt. The other goods news is that the score increase you may be eligible to earn from paying down your credit card balances and lowering your credit utilization can be earned incrementally (instead of an "all or nothing" scenario). In other words, as you pay down your credit card balances little by little you should begin to experience small credit score increases. You do not have to pay a credit card balance all the way down to zero on your credit reports before you can hope to receive a score boost.
