Credit Utilization Secrets: How to Skyrocket Your Credit Score. #creditscoreboost
One of the quickest tricks to improving your utilization is to split your monthly payment.
Pay half of it two weeks early and the other half of it when your payment is due. If you are always paying your credit card balance in full, this alone will cut your utilization in half. (Of course, that is assuming that your spending on the card is fairly consistent throughout the month.)
If you want to goose it even further, figure out when your credit card company reports to the credit bureaus and make a payment right before that day. Most credit cards report to the credit bureaus within a couple of days after the end of your monthly billing cycle. This is usually before you are required to make your minimum monthly payment. If you pay off your balance the day before the billing cycle ends, you can drop your utilization almost to zero. (Of course, that depends on whether you make any other charges between that time and when they report.)
So, how much does utilization really affect your credit score?
Here’s where things get interesting. Credit scores are incredibly complicated. They have dozens of different metrics that all interact to produce a score. It can be very challenging to determine how things will interact in your circumstances. BUT, utilization is kind of the exception. We analyzed millions of anonymized credit files and we found that utilization has an almost perfect linear relationship. That means that when your utilization goes down, your credit score goes up. It doesn’t matter if you drop your utilization from 90% to 80% or from 30% to 20%. That ten percentage point drop improves your credit score the same amount.
But, wait! You’ve probably heard people say that you should keep your utilization under 30%.
That’s just a rule of thumb someone made up because it sounded good. There is no basis in the data for 29% being significantly better than 31%. That’s actually good news. If you have a high utilization right now, you don’t have to get discouraged because it will take you months to whittle it down below 30%. Any improvements you make right now will improve your credit score. And, if your utilization is already at 30% and you are looking for more improvement to your credit score, you can still make progress by cutting your utilization.
So, what’s exactly is credit utilization.
The actual definition is, “The percentage of your available credit that you are currently using.” Utilization only matters for revolving credit: or credit that you can borrow against fluidly, like a credit card or a line of credit. If you have a single credit card with a credit limit of $1000, your available credit is $1000. Let’s say you make a $200 purchase. You are using 20% of your available credit. Your credit utilization is 20%.
If you have two credit cards, one has a $200 credit limit and the other one has a $800 credit limit, you still have $1000 in available credit. If you max out the first credit card, your utilization on that card is 100%, but your overall utilization is still just 20%.
It’s important to remember that credit utilization is not the same thing as debt. You can have a high utilization and never carry a balance or pay interest from month to month. The credit card reports your balance to the credit bureaus every month. They are not reporting whether the balance was carried over from previous months or just spending from this month. The credit bureau doesn’t care. They just want to know how much of your available credit you are using at the moment it is reported. It’s a snapshot at a single moment in time. (The credit bureaus are also interested in whether you are making on-time payments, but that is a different video.)
What is the ideal utilization?
I suppose the ideal credit utilization is below 10% or zero, but really only if you are still using the card. The credit scoring agencies love to see that you are using credit wisely. That means having credit, making payments, and not getting in over your head. That’s all they care about. They aren’t passing moral judgment on you. They are just trying to predict whether you are likely to default on a loan in the next 24 months. If you are using credit responsibly, you are giving them evidence that you are unlikely to default on a loan. That’s why a non-existent utilization doesn’t actually help you. Having no revolving credit is the absence of evidence about how you would handle credit. It’s important to leave a trail of breadcrumbs. They don’t know whether you have no credit because no one will give it to you or because you are trying to be responsible by avoiding credit cards. So, if you need to build your credit score, you need to give them footprints in the sand that show evidence of your responsibility.
It’s no longer enough to just be responsible with your finances. You need to be able to show that you are responsible with your finances. If you need a good credit score because you want to finance a new car purchase or buy a house or get approved for a nice apartment, you need to leave evidence that you are responsible with your finances. Managing your credit utilization is one of the best ways of producing that evidence.
If you have high credit utilization and you want to drop it very quickly, there is a way to do it…but it’s not without its risks. A debt consolidation loan pays off your credit cards with an installment loan. That installment loan is not calculated in your utilization. (It is calculated in your debt-to-income ratio…but that’s another video.) You can drop your utilization very quickly consolidating. But the risky part is making sure you don’t fill up those credit cards again. If you do, you will be in significantly worse shape. If you want to see what kind of debt consolidation loan you could qualify for, head over to our marketplace page at The Yukon Project. You can apply to any one of our featured lenders and we will check your rate with up to 40 other lenders behind the scenes. Our partners use a soft credit check, so applying won’t hurt your credit score. We will show you all of the lenders who will approve you so you can pick the loan that’s best for you.
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