Published in: Credit Cards | Oct. 10, 2018
By: Lyle Daly
When you're trying to improve your credit score, the most challenging and frustrating part is how long the process takes. So much depends on your payment history and how long you've had your credit accounts open, and it's impossible to speed up either of those.
There is, however, one way to boost your credit score that brings results much faster. If your credit utilization is too high, then fixing that could get you a better score in no time.
Credit utilization is the percentage of your available credit that you're using. Here's a simple example -- if you have one credit card with a $1,000 limit and a balance of $250, then your credit utilization is 25%.
With FICO® Scores, which are the most widely used type of credit score, credit utilization determines 30% of your score. That makes it the second-most significant factor behind payment history.
Card issuers usually report your current balances to the credit bureaus once per month. The credit bureaus then use your balances to calculate your credit utilization.
Although the conventional wisdom on credit utilization is that you should keep yours below 30%, that's only a suggestion and not a strict cutoff. It's more accurate to say that the more you can reduce your utilization, the better it will be for your credit score.
It's common to have more than one credit card, which leads to the question of whether it's your total credit utilization or your per-card credit utilization that matters. Let's say you have:
Your total credit utilization is 25%, because your combined balances are $500 compared to $2,000 in available credit across both cards. But your per-card utilization is 40% for Card A and 10% for Card B.
Total credit utilization is used more often, but both types can impact your credit score. After you've gotten your total utilization under control, you should focus on maintaining low per-card utilization, as well.
Under the current FICO scoring model, only your most recent credit utilization affects your credit score. Any previous balances become irrelevant the moment your card issuers report new ones. Since that happens monthly, you could go from bad utilization to great utilization in a month or less.
Imagine you have 80% utilization, which would decrease your credit score considerably. You then pay down your balances so that you're at 10% utilization. That's an excellent number, and the next time your card issuers report those balances, your credit utilization will be working for you instead of against you.
It's important to note that FICO's chief competitor, VantageScore, has started using credit utilization trends in its scoring model, which means your utilization history can impact your VantageScore. But FICO only looks at current utilization, and FICO scores are what most lenders use.
The obvious method to reduce your credit utilization is to pay down your credit card balances and avoid charging too much in the future, but that advice doesn't help if you're lacking the cash to follow it. Here are three options that can help even if you don't have any extra cash:
Let's look at each one in more detail.
The date when card issuers report your balances varies. Some could do it the day after your statement closing date, others the day after your payment due date, and still others on a different date entirely.
You don't need to be in the dark about this, though. If you call the number on the back of your credit card, you can ask exactly when your card issuer reports your balance. Then, make a payment a day or two before that instead of waiting for the due date. Just timing your payments like this may lower your credit utilization quite a bit.
If you don't have the money to pay down your balances yet or your credit limits aren't very high, you could try asking your card issuers to raise those limits. Higher credit limits give you more available credit, and that means lower utilization.
Card issuers are more likely to grant your request if you've been a model customer for them, so ideally, you'll have been paying your bill on time and paying more than the minimum. Remember to ask all your credit card issuers. Even if some decline your request because your balances are too high, you could have more success with a card you use less and don't currently have a balance on.
Conventional wisdom says that another credit card is the last thing you need when you have credit card debt. While you don't want to dig yourself into a deeper hole, getting a new credit card will add to your total available credit.
Depending on your credit score, you could even try to get a balance transfer card where you can shift all your balances. These cards often have 0% intro APRs, so you'll benefit by increasing your available credit and being able to pay down debt interest-free until the intro period ends.
Some factors that determine your credit score can't improve overnight. Credit utilization is the most significant exception, so reducing yours could lead to a big jump in your score.
As long as you pay them off each month, credit cards are a no-brainer for savvy Americans. They protect against fraud far better than debit cards, help raise your credit score, and can put hundreds (or thousands!) of dollars in rewards back in your pocket each year.
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