If you were a fly on a wall in my office, you would hear me say several times a day, this little known fact that accounts for 30% of a borrower’s credit scores!
30% of a person’s credit score is based on balances reported for revolving accounts like credit cards or lines of credit, compared to the credit limits as a percentage. So for instance, if a person has a credit limit of $300 and has a balance of $290, it can really kill a credit score. The $290 is a very small balance but when compared to a credit limit of only $300, it is about 97% of that limit. So how do you fix this to get maximum credit score points? Pay off the card, charge something under 10% of the credit limit, and when you get the bill pay it off, and then do it over each month. Also keep in mind also that usually the statement balance on the credit card is what will be reported on credit.
This brings up another misconception about scores: Do Not Make This Mistake!
People often think that if the limit on a credit card is $300, they should charge $300, and then pay off the balance to get the best scores. In this case, it would be looked at as owing 100% of the limit and would hurt a score tremendously. Also keep in mind that it can take 30 – 45 days for the new balance to update on a credit report which is another reason to not let the balance go over 10% of the limit so you never have to worry about a drop in the scores.
If someone has a bad experience with cards in the past or hears the horror stories about how people get in trouble overusing cards, they are often apprehensive about getting a credit card. I can certainly understand that but when someone doesn’t have revolving accounts, a credit score can only go so high as it again counts for 30% of someone’s scores. Just by opening a card or two, charging $20 – $30 once per month, and paying off the balance in full each month, will give the person a pretty good jump in credit scores in as little as 2 – 3 months. So as long as there is discipline to only charge the small amount each month and to pay off the balance every month on-time (pay on time no matter how small the balance is!), a credit score can increase a good amount. This can be the difference in an approval or denial. A 640 score could get a USDA approval or Down Payment Assistance, where a 639 would not. Or it can make a small but important difference by improving an interest rate.
So if you’re looking for the quickest way to increase your credit scores, do the following to maximize the points for the category of “Revolving balances compared to Credit Limits“
- Make sure you have 2 – 3 revolving accounts
- Get the balance under 10% of the credit limit or pay it off (if possible)
- If you pay off the balance, then charge $10 or $20 on the card each month, and pay it off as soon as you get the bill
- Keep the cards open for a very long time
By following the above steps with revolving accounts like credit cards or lines of credit, you will:
- Have on-time pay history without having to borrow a lot of money or pay a lot of interest – Pay history accounts for 35% of a credit score
- Will owe less than 10% of the credit limits on revolving accounts – Percentage of balances to credit limits accounts for 30% of a credit score
- Keep the accounts open forever – Length of credit accounts for about 10% of a score
With this little known information, this can be a huge step in a lifetime of great credit scores and qualifying for better terms for everything including auto loans, credit cards, mortgages, insurance, etc. If you have further questions on credit scoring or to see if you qualify for a mortgage, Contact Us Today.