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Analysts: Debt Cut Not Good for Score

By Sally Maison
Published: Tuesday, October 6th, 2009

Finance analysts point out that trimming on debt too much may hurt a consumer’s credit score. Just recently, the Federal Trade Commission (FTC) released statistics revealing a record fall on consumer borrowing.

Analysts: Debt Cut Not Good for ScoreIn a recent release by FTC, statistics show that borrowing by Americans from June to July fell to $21.6 billion.  The commission says the 11.7% decline is a record low, the first time in 64 years. Economic specialists say that consumers borrowed greatly on the onset of recession and reduced their debts rapidly as they began to feel its enormous weight on their finances. Uncertainty on economic recovery and soaring unemployment rates prompted Americans to cut back on what they owe, analysts say. While most consumers think that hoarding money is good for them, experts have another thing in mind.

Analysts say that the amount of debt one has is a major factor in his credit report, and having too little of it may not be good. They say that the most common mistake of consumers lately is paying off their credit card balances and closing their accounts right away. Consumers say they do this so they would not be tempted to borrow more but analysts remind them that closing a card means removing significant credit from which affects their score.

Experts say that a credit account contains payment history, credit limit, and length of credit history. These are three important factors in a FICO score, making up 75% of it. According to Fair Isaac Company, which developed the most widely used scoring system, closed accounts are no longer factored in computing a consumer’s present score. This means that a credit card that has been paid promptly, has a high credit limit, and has existed for a relatively long time, can no longer improve a score because it is already slashed off.

Specialists advise consumers to acquire few debts and pay them off regularly to improve their scores. Keeping a balance-free account does not hurt a score but it does not do it good either, experts say. Consumers can use their cards to make small purchases such as grocery items and make prompt payments afterwards. However, they warn consumers not to make delinquent payments since something as small $20 could mean a 100-point decrease. They also tell consumers to check their credit limits regularly and not to let their debt-to-credit ratio exceed 30%.

Finally, consumers are advised to stay prudent on their budget since the country’s increased economic output does not help that much in the personal level.

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