1 Credit Score Tip Some People Get Wrong

No doubt there's an abundance of credit score information available on the internet. But along with handy tips to improve the most popular credit score -- the FICO score -- there's a mountain of tips and insights that may lead people in the wrong direction, which could mean a lower credit score and lower odds of qualifying for the best credit card sign-up bonuses, which tend to be reserved for those with good credit.

With this in mind, Motley Fool analysts Michael Douglass and Nathan Hamilton discuss, in the video below, one credit score tip some people get wrong. 

Michael Douglass: So there's a lot of misinformation about credit scores on the internet, and in addition to this information, there's also just a lot of very vague information. Sort of like pay off your balance early. OK, what does that mean? It's an easy thing for people to get wrong, and a lot of people do.

Nathan Hamilton: Yes.

Douglass: So let's try to really hone in on that -- when it makes sense to pay off your balance. But before that, let's talk more broadly, like why paying your balance off is important. Of course, it's important from a debt perspective, from a management perspective so you aren't paying all that interest, that high interest rate on that credit card. But it's also important for your credit score.

Hamilton: It is. There's essentially two ways that it's going to impact your credit score. One is 35% of your FICO score is impacted by making payments on time. The second part -- 30% of your credit score -- is affected by what's called your "credit utilization ratio." Simply put, it's just how much are you borrowing versus what's available. If you have $100,000 in available credit and you're taking $10,000, you've got a 10% credit utilization rate.

One thing that misinformation or vagueness may come across and not hit the point home, is when to pay off your balances monthly to reduce your credit utilization ratio because people say, in vague terms, "pay off your balances monthly." OK, but what does that actually mean?

Douglass: Right.

Hamilton: Is that by the statement date? Is that by the due date? And to cut through the noise of the misinformation out there, it is the statement date. So that's when essentially your statement -- the date at the top that you see on your PDF when you pull it up online -- that is the date that your balances are reported to the credit bureaus, which feed into the FICO scores. And if you are reducing your balance before that statement date, [if] your balance is lower, [and] your available credit limit is the same, the utilization ratio improves.

So it is really important to pay attention to the statement date and don't, so much, look at the due date when you're trying to improve your FICO score.

Douglass: Right. You want to make sure you get it in before that statement date.

Hamilton: Yes.

Douglass: Absolutely. With an internet that is full of a lot of misinformation and a lot of vagueness, fortunately there are some really good resources out there. And one that we'd highlight is fool.com/credit-cards. We've got a lot of information about debt management, a lot about how to manage your credit score, and a lot about credit cards. How to think about credit cards, and what's the best way to use them.

We also have copies of our credit card guides available for free online and our picks for the best credit cards of 2017. If you're wondering whether you're getting the right rewards, that's the place to go.

Again, check us out at fool.com/creditcards. Nathan, thanks much.

Hamilton: Absolutely.

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