We all need to understand the Amounts Owed section on credit scoring, because it makes up a crazy 30% of the credit score!
The points you get under Amounts Owed is almost as much as all your positive credit history and all of your derogatory
See if you can get this credit scenario right:
Three people have identical good credit reports except for each one having one negative item. Which person will have their Amounts Owed (30% of the scoring model) docked the most?
1) Ms. Blue has a $500 Nordstrom card that went unpaid, became a charge-off, and is still has a balance of $500 on a $500 limit.
2) Ms. Green has an unpaid tax lien of $860.
3) Ms. Purple has an unpaid utility bill of $1,000.
Whose credit score got hit the hardest under the Amounts Owed section?
Take your best guess and then let me know by leaving a Comment if you got the answer right.
If you said Ms. Purple because her utility bill has the most money owed, you are wrong.
If you said Ms. Green because a tax lien is serious stuff, you are also wrong.
Ms. Blue is really feeling blue right now, because even though she owes less than her two friends, her credit score got hit the hardest for the $500 maxed out Nordstrom card. How can that be?
The Amounts Owed section applies only to revolving credit. Revolving credit does not have a fixed number of payments, and every time you make a payment, the credit is automatically renewed. Neither a tax lien nor a utility bill are revolving credit. Therefore, the amount you owe on those bills does not affect the super-important Amounts Owed section of your credit score.
When you know how the scoring system works, you are in control of your own credit score. To learn more about credit scoring, pick up a copy of Build and Protect Your Credit Like the Pros here.
Ms. Blue, I presume(?) Btw, loved your book so much! It is a part of my permanent library and I recommend it to friends.
Yes, you are correct. The maxed out credit card is the most damaging for “Amounts Owed.” Thank you for your kind compliment on Repair Your Credit Like the Pros. Your recommendation is the best compliment you could give me!
Hi Carolyn: What about education debt – is that revolving credit? It has a fixed number of payments so just wondered.
Student loans, education debt, is not revolving credit. It has a fixed payment and fixed end date. That is an installment loan. With an installment loan, being maxed out is not docking your score like a credit card. Student loans paid on time every month are very beneficial to your score! FICO scoring loves student loans paid on time.