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Credit scores and the fresh start of bankruptcy, Part 1

The Federal Reserve recently published a report showing that roughly 72 percent of American consumers carry at least one credit card. The average consumer holds three or more credit cards. In some instances carrying more credit cards can help a consumer's credit score. However, credit scores are complex animals.

Outdated, false and inaccurate data in a credit report can have an adverse effect of a consumer's credit score. Cincinnati residents can seek to restore a credit score when inaccurate information is adversely affecting a credit score. However, some information, including a high debt utilization ratio can adversely affect a credit score.

Many Ohioans parallel the national statistics when it comes to credit card usage. Nationally, a number of consumers chose to have a single card for use only in emergency situations. Often, the concept includes the intent to pay the card off each time it is used in order to keep debt low. The strategy can be very effective.

Other consumers choose to have a number of cards to keep the debt utilization ratio down. How the ratio works is pure math. A consumer with one card with a credit limit of $2,000 and an outstanding balance of $1,800 creates a debt utilization ratio of 90 percent. Some experts suggest keeping balances in the 10 to 30 percent range on any given card to improve a credit score based upon the debt utilization ratio concept.

That often leads to consumers increasing the number of open credit card accounts. It only stands to reason, however, that an increase in cards may also lead to an increase in overall outstanding debt. FICO, the company that developed the credit score concept warns that increasing total available credit can also backfire and lead to lower credit scores. The utilized debt ratio is only one factor in computing the overall score.

For some individuals who have faced unexpected changes in circumstances or emergency situations, worries over their credit score can stop them from looking into seeking debt relief for fear of the adverse impact debt relief may have on a credit score. Tomorrow, this blog will continue the discussion regarding credit scores and the potential fresh start that bankruptcy can provide in turning around an individual's financial situation.

Source: San Francisco Chronicle, "How Many Credit Cards Should You Have?," Amy Fontinelle 18 Jul 2011

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