Credit score lower than you expected? This sneaky factor could be why

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Credit ratings are complicated beasts. The three major credit bureaus use different formulas to calculate their scores, but they generally consider the same key credit factors, such as payment history, credit mix, and the age of your credit accounts.

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One important part of your credit score that doesn’t always get as much attention as the rest is your credit utilization rate, or the amount of available credit you’re currently using. Unlike most other factors, your credit ratio can change from week to week, or even day to day, and it can account for up to 30% of your credit score.

Find out how the credit ratio affects your credit score and how you can optimize it to increase or maintain your high credit score.

To learn more, find out how debt consolidation and student loan forgiveness could affect your credit score.

What is my credit utilization rate?

Simply put, your credit utilization ratio is the percentage of your available credit that you are using. For a basic example, if you have a credit card with a limit of $1,000 and your current balance is $200, your credit ratio is $200/$1,000, or 20%.

VantageScore will only consider revolving credit or credit card accounts in calculating your credit utilization rate. FICO will consider your credit score as part of its “Amounts Due” category, which is the total amount of debt you have.

It is important to remember that VantageScore and FICO monitor your total credit usage (using the balances and credit limits of all your credit cards) as well as ratios for each of your individual accounts. If your overall ratio is moderately low, but you’ve maxed out on one card, it could lower your credit score.

Perhaps most importantly, the credit bureaus do not calculate your credit utilization rate using your current credit card balances. They calculate it using the account balances that your credit card issuers report to the credit bureaus. Each issuer has its own system, but the numbers reported are often your monthly statement balances.

Even if you pay off your credit card balance every month, if you have a high credit ratio at any point in your billing cycle, it could hurt your credit score.

What is a good credit utilization rate?

“It is generally recommended that your credit card balances be maintained at 30% or less of your assigned credit limit,” said Bruce McClary, senior vice president of National Credit Counseling Foundationtold CNET.

While a credit ratio of 30% or less is the general guideline, those who want excellent credit scores will need to keep it even lower. According to the rating company Experian“If your focus is on great credit scores, a single-digit credit utilization ratio is best.”

“The truth is, the lower your balance, the better. The more you carry, the more it could lower your score,” Todd Christensen, head of education at Money Adjustmenttold CNET.

But do not aim for a credit ratio of 0%. Experian also says that “the only way to be sure that you have 0% usage all the time is to refrain from using your credit cards at all”, which could lead to your account being closed by a issuer, reducing your available credit and increasing your ratio.

How can I reduce my credit utilization rate?

Since the credit ratio is an expression of the money borrowed divided by the credit limit, the main ways to reduce this ratio are to reduce your debt and increase your credit limit. Here are the best ways to achieve this.

First, pay off your debt as much as you can

The simplest answer to lowering your credit ratio – paying off your debt – can also be the hardest to achieve. If you can reduce your debt, however, you’ll get a double win – in addition to lowering your credit ratio, you’ll also save money in finance charges, i.e. the interest you pay on your debt. credit card.

Then ask for a higher credit card limit

Increasing your credit limit will help lower your credit ratio because the amount you owe is now a smaller percentage of the maximum you can borrow. It’s easy to request a credit card limit increase – just call the phone number on the back of your card and speak to a representative.

Before asking for a higher limit, however, keep a few things in mind. This strategy only works if you don’t increase your balance owing. If a higher limit tempts you to spend more, you might want to reconsider.

Also ask your credit card representative if the company will arrange a firm credit check before approving your request. Although a higher limit improves your ratio, a thorough investigation could lower your credit score by 5 to 10 points for about a year.

Set up credit card balance alerts

Most credit cards now allow you to create online notifications for your account, including your balance amount. These can be emails, text messages, or alerts through your credit card’s website.

To protect your credit ratio, set up an alert that notifies you when your balance reaches 25% of your credit limit. This balance level will give you some padding to make sure you stay below the recommended ratio of 30%.

Keep your old credit cards and use them a little

If you have older credit cards that you don’t use much or at all, don’t cancel them. You will only reduce your overall credit availability and hurt your credit ratio, as well as your average credit age.

However, if you don’t use a credit card at all, the issuer may cancel it for lack of activity. Instead, use old cards sparingly, like buying every few months, to keep your accounts open and your total available credit high.

Once you know the principles of the credit utilization ratio, you can use these tactics to lower your ratio and boost your credit score.

To learn more about best practices for good credit scores, find out how build credit quickly and how to get a free weekly credit report until the end of the year.

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