One of the biggest factors affecting your credit score, right behind payment history, is your credit utilization ratio. This sounds complicated, but it’s simply your total credit balance versus your total amount of credit, represented as a percentage.
For example, if you have two credit cards, each with a $500 limit, and you have a $100 balance on one and a $150 balance on the other, your total credit balance is $250 and your total amount of credit is $1000, so you have a utilization rate of 25%.
Ideally, you want to stay below 30% utilization to get a good score on both the FICO and the VantageScore systems. For many people living at or near their limits, however, that’s easier said than done. To help, here is how to lower your credit utilization smartly.
Stop The Hemorrhaging
If you carry a few high-interest cards in your mix, consider using credit card debt consolidation to not only stop the interest from piling up but to gain a little wiggle room with your other cards. Once you are no longer stuck in a cycle of late payments and accruing interest, you can catch your breath and start to catch up on payments.
Pay Ahead Of Bureau Reporting
Most card issuers and banks report payments and balances to the bureaus once a month. But if you pay on the 27th each month and they report balances on the 20th, it looks like you carry a balance each month, and your timely payment isn’t recorded until the following month’s report.
This tip is rarely used, but it can mean a significant change in your utilization if you tend to carry a balance but pay it off in full each month. Call your issuer and find out when they report, and pay as much of your balance or payment as you can before that date.
Even if you have the money to make a single payment to clear your balance, making half of your payment mid-cycle can help your issuers report lower balances consistently. If you get into the habit, it can also start to save you significant interest on any balances you carry.
Nearly all banks and credit card issuers have the ability to set up balance or usage alerts. Nobody likes to be nagged about getting close to their limit, but being smart about your alerts can help you reign in your usage. Set alerts for 25% of your limit, so you’ll know when you’re getting close to going over your 30% goal.
All Zeros Except One (AZEO) is a method for paying off credit cards on a rotating basis before they are actually due. This can be a great way to gain a robust credit boost over a one or two-month sprint.
For instance, if you have 4 credit cards, all with payment due dates near the end of the month, paying off 3 of them completely by mid-month allows them to be reported as a $0 balance. The 4th card is kept to a utilization below 10%.
Follow these tips to lower your credit utilization smartly and watch your credit score rise.