Understand credit utilization and use it to boost your credit score.
Money Girl
270 MG Credit Utilization-What It Means for Your Credit Score
Nearly a billion people experienced hunger last year, and organizations on the frontline need support. That's why at Global Citizen Festival, City announced a new commitment supporting World Food Programs Mission, and you can help. City will match donations to World Food Program up to $250,000 until December 1st or until we reach our goal, whichever comes first. Visit wfpusa.org/city to make a donation and double your impact. For the love of making a difference, for the love of progress, City. Hey, Fidelity. How can I remember to invest every month? With the Fidelity app, you can choose a schedule and set up recurring investments in stocks and ETFs. Oh, that sounds easier than I thought. You got this. Yeah, I do. Now, where did I put my keys? You will find them. Where you left them. Investing involves risk, including risk of loss. Fidelity, brokerage services, LLC, member N-Y-S-E-S-I-P-C. Hi, friends. Thanks for downloading the MoneyGirl podcast. I'm Laura Adams. When it comes to credit scores, there are several key factors that cause them to go up or down. In this episode, I'll answer five questions from MoneyGirl listeners and readers about one of them called the credit utilization ratio. To build excellent credit, making payments on time is king because it makes up the largest percentage of your credit scores. But the next most powerful factor is credit utilization. So I guess that makes it the credit queen. Your credit utilization ratio is a simple formula that divides your outstanding balance on a revolving account like a credit card or a line of credit by your available credit limit on the account. For example, if you currently owe $500 on a credit card that has a credit limit of a thousand, your ratio is $500 divided by a thousand or 50%. The lower your credit utilization ratio, the better. A low ratio tells potential lenders and merchants that you're using credit responsibly. A high ratio says you're maxed out and may even be getting close to missing a payment. Now that you know the basics, let's cover five specific questions that I've received about credit utilization. Question number one is from an anonymous reader who asks, "I'm a student and will be getting my first secured credit card soon with a $300 credit limit." To build credit quickly, what's my ideal credit utilization ratio? A secured credit card is the perfect way to build credit for the first time. You make a refundable deposit that could range from $200 up to several thousand, and that becomes your credit limit. I recommend never letting your credit utilization creep above 30%, no matter if you're just starting out, or already have a thick credit file. Applying this rule to the reader, he or she would never charge more than $90 a month, which is 30% of the card's $300 credit limit. If you want to charge higher amounts on a secured credit card and maintain a low utilization ratio, you can increase your security deposit so your credit limit goes up. If you have a regular unsecured credit card, you can contact the card company and request a credit limit increase. Question number two comes from Frank W, who wants to know, "If I may credit card charges that approach my credit limit each month, but pay off the balance in full by the statement due date, do I even have a credit utilization ratio, or is it always 0%?" Paying off your credit card each month is a smart way to avoid all interest charges. However, if you're like Frank and max out your card before paying it off, you may still have a credit utilization ratio that's dragging down your credit scores. Credit cards have a date that they report your payment information and account balance to the nationwide credit agencies each month. This date is typically not the same as your statement due date. If Frank's outstanding balance is high on the date his card company reports it, he'll have a high utilization ratio. A good solution for Frank would be to get a second credit card and spread out his charges on two accounts. If approved for a second credit card with a similar credit limit, he could cut his utilization ratio in half. Here's how that works. Let's say you charge $600 on a card with a $1000 credit limit. That's a 60% utilization ratio, right? But charging $300 on two cards that each have limits of $1000 is a utilization of 30%, because the math is now $600 divided by $2000. It's always better to have low balances on multiple credit cards than to have one card that you consistently max out. Question number three is from Seket, who says, "I just paid off all my credit card debt. Going forward, I plan to use my cards only for purchases that I can pay off in full each month. When should I pay my credit card bill so the credit agencies only see my balance as zero when I receive the bill or earlier in the month?" Good job on paying off all your debts, Seket. To know exactly when your credit card reports outstanding balances to the credit agencies, you'll have to ask them. If they tell you, simply make a full payment before their reporting date. But if for some reason they can't or won't tell you a specific reporting date, here are some solutions to keep your credit utilization ratio as low as possible. Request a credit limit increase on your account. Spread out your charges among several cards each month or make payments more frequently, like buy monthly or weekly. H5N1 bird flu is spreading in some animals. If you work with poultry, dairy cows, wild animals, or with raw, unpasteurized milk, wear protective gear and take precautions, cdc.gov/birdflu, a message from CDC. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science, and social studies. Ixcel has interactive practice problems for topics from pre-k to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards, and explanations for wrong answers. Ixcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems, and learning games, too. One subscription to Ixcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. Is it time to reimagine your future? The right business skills may make a difference in your career. At Capella University, we offer a relevant education that's designed to focus on what you need to know in the business world. We'll teach professional skills to help you pursue your goals, like business management, strategic planning, and effective communication. And you can apply these skills right away. A different future is closer than you think, with Capella University. Learn more at Capella.edu. For question number four, Lisa wants to know, "I have several credit cards with high balances. Is it better for my credit to pay a larger amount to just one of them each month, or to pay smaller amounts on several of them at the same time?" Credit scoring models generally score each account's utilization ratio individually, and then add them up for an overall ratio. But having a high balance on just one credit card is a sign that you may be a risk to a potential creditor or merchant, even if you haven't been laid on any payments. As I previously mentioned, that means you're better off having multiple accounts with low balances. So Lisa should spread out her payments and make it a goal to get all of her credit cards below a 30% utilization ratio as quickly as possible. And question number five is from Dave, who says, "I'm fed up with both of my credit cards because they're now charging an annual fee. Would canceling them really hurt my credit?" To maintain a good credit history, you need to have at least one credit card. If the card offers rewards, like cashback or travel miles, it makes sense to keep it, as long as the rewards are worth more than the fee. Cancelling a credit card can dramatically increase your credit utilization ratio because your available credit on the account goes to zero, but you still have the same amount of total debt. That will cause your credit scores to drop right away and could ruin your ability to get new credit, like a mortgage or a car loan, in the near future. Lower credit scores can also have other negative side effects, like higher insurance premiums, or getting passed over for a new apartment or job that checks credit. But depending on Dave's situation, if he's still determined to close his two credit cards, a smart strategy would be to do it gradually. He should get a replacement card first and then cancel one of his existing cards a few months later, then repeat the process. The bottom line, it's impossible to change anything in your credit file without it affecting your credit scores. Don't let a relatively small issue, like an annual fee, cause you to make a knee jerk decision that could hurt your credit and finances in the long run. To learn much more about credit, download the Credit Score Survival Kit. It's a free multimedia resource I created as a gift for you, with a video tutorial and three smart strategies to build excellent credit scores that you can read or listen to. Plus, I tell you how to save money by getting your credit score absolutely free as often as you want. Download the Credit Score Survival Kit for a limited time when you visit smartmoves to growrich.com. As always, you'll find links to everything I've mentioned on the MoneyGirl page at quickanddirtytips.com. Just look for episode number 270 called Credit Utilization, what it means for your credit score. While you're there, go ahead and sign up for the free MoneyGirl newsletter. Join the MoneyGirl Facebook page, follow on Twitter, and submit your money question. I'm glad you're listening to change. That's all for now, courtesy of MoneyGirl, your guide to a richer life. H5N1 bird flu is spreading in some animals. If you work with poultry, dairy cows, wild animals, or with raw, unpasteurized milk, wear protective gear, and take precautions. CDC.gov/birdflu, a message from CDC. A Capella University learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think with Capella University. Learn more at Capella.edu. [BLANK_AUDIO]