Tweaking Your Credit Card Balance Could Boost Your Credit Score Quickly
your Payment history is the biggest factor in deciding your credit scorebut in addition to your total available credit, mix of credit types and credit history, you also need to understand another important component of your credit profile – your credit utilization ratio.
Credit utilization ratio represents the percentage of total available credit that is currently being used and can affect 10-30% of your credit score. If your credit limit is relatively low, it shouldn’t cost much to lower your ratio to build your credit score.
If you’re not sure how exactly credit utilization works, don’t worry. We’ll help you understand the impact this ratio has on your credit score and give you tips and tools to reduce your credit utilization and improve your credit score. For more information check out these Tips to Keep Your Credit Score Over 800 or Learn about the three major credit bureaus and how they work.
What is credit utilization ratio?
Your credit utilization ratio is the percentage of your available credit that you are using. As a basic example, if you have a credit card with a limit of $1,000 and your current balance is $200, your credit ratio would be $200/$1,000, or 20%.
VantageScore will only consider revolving credit or credit card accounts when calculating your credit utilization ratio. FICO considers your credit ratio to be part of its “amount owed” category, which is the total amount of debt you have.
It’s important to remember that VantageScore and FICO monitor your all Credit utilization (the balance and credit limit used on all credit cards) and ratios each Your personal account. If your overall ratio is low but one of your cards is full, it could lower your credit score.
Perhaps more importantly, the credit bureaus don’t use your current credit card balances to calculate your credit utilization ratio. They calculate this using the account balance reported by the credit card issuer to the credit bureaus. Each issuer has its own system, but the number reported is usually the balance in the monthly statement.
Even if you pay off your credit card balance each month, it could hurt your credit score if you have a high credit ratio at any time during the billing cycle.
What is a good credit utilization ratio?
“It’s generally recommended to keep your credit card balance at or below 30 percent of your designated credit limit,” says Bruce McClary, the company’s senior vice president. National Foundation for Credit Counselingtold CNET.
According to CBS News Financial Watcha credit utilization ratio of 50% or higher can lower your score by 50-100 points, while a full credit ratio of 90% or higher can lower your score by 100 points or more.
While a credit ratio of 30% or lower is a general guideline, those who want an excellent credit score will need to keep it lower. According to credit rating companies Experian“If you focus on having an excellent credit score, a credit utilization ratio in the single digits is best.”
“The truth is, the lower your balance, the better. The more you carry, the more likely your score will go down.” Education Manager Todd Christensen money fittold CNET.
But you shouldn’t set your credit ratio at 0%. Experian also says that “the only way to ensure your utilization ratio is always 0% is to not use your credit card at all,” which could cause the card issuer to close your account, reduce your available credit and increase your ratio.
How to lower your credit utilization ratio?
Since your credit ratio is an expression of borrowed funds divided by your credit limit, the primary way to lower this ratio is to lower your debt and increase your credit limit. Here are the best ways to achieve this.
Pay your credit card bill twice a month, or even more
Credit card companies regularly report your balance to the credit bureaus, and this number usually comes from your credit card statement. Even if you pay off your credit card bill every month, your credit score will be affected if your statement shows a high balance as a percentage of your credit limit.
If you use your credit card frequently, consider making two payments per month, or when your balance approaches 30% of your credit limit. An online credit card account lets you easily pay or schedule any number of payments, and you can set notifications for your balance (see below).
If your limit is $1,000 and you spend $900 per month on the card, a 90% credit utilization ratio will almost certainly lower your credit score. If you pay off your balance when it reaches $300, or pay it off three times a month, a high ratio won’t hurt your credit score.
Create a credit card balance notification
Most credit cards now allow you to create reminders online for your account, including the balance amount. These can be emails, text messages or reminders via credit card websites.
To protect your credit ratio, set up a notification when your balance reaches 25% of your credit limit. This balance level will give you some padding to ensure you stay under the recommended 30% ratio.
Ask for a higher credit card limit
Increasing your credit limit will help lower your credit ratio because the amount you owe is now a smaller percentage of the maximum you can borrow. Requesting an increase in your credit card limit is easy—just call the number on the back of your card and speak to a representative.
However, there are a few things to keep in mind before asking for higher limits. This strategy only works if you don’t increase the balance you owe. If a higher limit tempts you to spend more money, you may want to reconsider.
Also, ask your credit card representative if the company will operate Hard credit check before approving your request. While higher limits will help improve your ratio, hard inquiries can drop your credit score by 5 to 10 points over the course of a year or so.
Keep old credit cards and use them a little
If you have an old credit card that you use infrequently or not at all, don’t cancel them. You’ll only lower your overall credit availability and hurt your credit ratios as well as your average credit age.
However, if you don’t use your credit card at all, the card issuer may cancel it due to lack of activity. Instead, use your old card sparingly, such as making purchases every few months, to keep your account open and your total available credit high.
Once you understand the principles behind your credit utilization ratio, you can use these strategies to lower your ratio and improve your credit score.
For more information, check out our Best credit cards to build credit.