If you're looking to raise your credit score (or keep it nice and high), there's one thing that can affect your score a lot!
Your score is typically based on five main things: Your payment history, credit utilization, credit history, credit application pace and your credit mix.
Of course you want to pay all of your bills on time, but the second biggest factor in your credit score is credit utilization.
What is credit utilization?
Simply put, it's how much of your credit you're using. For example, if you have a credit card with a $5,000 limit and your balance on that card is $5,000, you're at 100% credit utilization on that card because you're using all of your available credit. If you use only $1,000 of your available credit, you're at 20% utilization on that card, because you're only using 20% of your available credit.
For the purposes of your credit score, credit utilization typically only focuses on revolving credit, like your credit cards. It doesn't factor in your mortgage, student loans or other debt.
Here's what to remember:
If you want a high credit score, you want to keep your credit utilization low.
According to Experian, one of the credit bureaus, having a utilization of 1% to 9% is ideal. You get lots of positive points for that without being penalized for not using your credit at all. Using 10% to 29% is still ok!
But once you cross that 30% threshold, your credit score might start going down, Experian warns. This is because banks believe keeping your debt low means you're a responsible person and you aren't a financial risk to your creditors.
There are a few things you can do to help lower your credit utilization and raise your credit score:
- The easiest one is to use your credit cards as little as possible, and pay them off promptly. It's a good idea to pay your balances before the credit card's payment due date!
- If you've been responsible about your card usage, you may also call your credit card company and ask for an increase in your credit limit. If your limit increases and you don't use more of the available credit, your credit utilization will go down on its own!
- You should also try to spread out your debt, if possible. If you have three credit cards, use each one just a little bit instead of maxing one of them out fully.
Want to learn more about the other factors that factor into your credit score? Be sure to sign up for our free webinar, "Understanding Your Credit Report and Score," on Friday, September 25 at noon (ET). You can sign up by going to cofcu.org/events.