Credit Card Utilization
Credit repair clients often ask what they can do to improve their FICO scores. While there are several strategies, such as making all payments on time, it’s a well-known fact that paying your credit card bill on time is one way to achieve a higher credit score. However, did you know that you can actually see a decrease in your score even if you pay your bill in full and on time every month?
Credit card utilization is the percentage of your credit line that is being used. Lenders view it as a key factor in a consumer's overall financial health. If you're using more than 30% of your available credit at any given time, it may signal to lenders that you could be experiencing financial difficulty or possibly living beyond your means.
For example, if you have an $850 balance on a credit card with a $1,000 limit, your utilization rate is 85%. This could be a red flag to a lender because you're using such a high percentage of your credit. If they see you as a risk, they may be hesitant to approve additional credit.
Why Is Credit Utilization A Factor In Your FICO Score?
According to Fair Isaac Corp. (FICO), which is used by 90% of all lenders in America, 30% of your credit score is based on credit utilization. Keeping that percentage low demonstrates to lenders that you know how to spend and manage your credit responsibly, creating a direct correlation between a consumer's credit card utilization rate and their credit score. Those who maintain their average utilization at or below 30% generally have higher credit scores than those who run their balances up to the limit (or higher) every month.
What To Do---What Not To Do---To Reduce Your Utilization Rate
1.Make More Than One Payment Per Month: This helps keep your balance lower at any given time, especially when it is reported to the credit bureaus at the end of a billing cycle.
2.Spread Out Your Spending: If you have multiple cards, distribute your spending among all of them. This keeps your utilization lower on each card, rather than having a high balance on one card and a zero balance on another.
3.Keep All Your Accounts Active: While conventional wisdom might suggest stopping the use of one card, this can lead to the card being closed by the lender due to inactivity. Closing a card would effectively increase your utilization rate on other cards because of a lower overall available credit limit. At least once a year, make a purchase on an unused credit card and pay off the balance after the statement cycles.
Calculate your credit utilization on each credit card account monthly by dividing the current balance by the approved credit limit. Once you have that total, multiply it by 100 to express it as a percentage.
If you come up with percentages over 30%, it may be time to brainstorm and develop a plan for reducing your credit utilization. It's a significant factor in your overall credit score and is worth the effort.
Instead of paying down all credit cards at the same time, we suggest using the “Snowball” method to reduce credit card balances in order to raise your credit scores. Focus on paying more on the credit card that is closest to the 30% limit to get it below 30% first, then move on to the next closest one, and so on, until most of your credit card balances are below the 30% limit.
Credit utilization is a major issue for many credit repair clients and is one of the main areas they can work on themselves to make a significant difference in raising their FICO scores.
Remember, credit restoration is a marathon, not a sprint. It doesn't happen overnight! Even more importantly, it’s a team effort.
