The majority of Americans depend on credit to pay for their expenses. According to the Federal Reserve, there are 333.6 million credit cards being used in the U.S. Also, according to the consumer credit reporting agency Transunion, 71% of all adults have credit cards, with the average credit card debt per adult being 5,327 dollars. As Americans become more reliant on credit, it is important to understand the importance of a credit score and the various ways that it can be increased.
Credit Utilization Ratio
One of the most effective ways to improve your credit score is to lower your credit utilization ratio. A credit utilization ratio is the amount of credit used compared to the credit limit. In simple terms, as your credit card utilization goes up, your credit score goes down. According to myFICO, 30% of your credit score is based on how much you owe creditors. You want to make sure your credit utilization ratio does not exceed more than 30%. Keeping a credit utilization ratio of 30% or lower shows that you don’t rely too heavily on credit to pay for day to day expenses.
Make Smaller Payments
Making smaller payments several times a month and paying a little more than you owe instead of waiting till the last day before your payment is due is another way to lower your credit utilization ratio. Paying what you owe with these “micropayments” shows credit bureaus that you are not only making your payments on time, but that you are also paying a little more than the bare minimum of your required monthly payments. This method will help keep your credit utilization ratio low.
Raise your Credit Limit
Imagine you have a credit card with a credit limit of 1000 dollars, but you have already used 500. This means your utilization ratio is 50% and will therefore lower your credit score. But if you ask your lender to raise your credit card limit to 2000 dollars, your credit card utilization ratio will drop to 25%.
Payoff your Highest Utilization Ratio Balances
Let’s say you have two credit cards with a credit limit of 1000 dollars. One of your cards has a credit utilization of 20%, while your other card is maxed out at 1000 dollars. It is more important to pay off the debt of the maxed out card first, because it has a utilization ratio of 100%. A utilization ratio of 100% looks bad to credit bureaus and will therefore lower your score. The credit card with a utilization ratio of 20% is below 30% and is currently in good standing. Taking care of the credit card with the highest utilization rate first means that your utilization ratio for that card will decrease and over time and your credit score will improve.
Debt Consolidation Loan
Taking out a loan to pay off several cards with high utilization ratios will lower your credit utilization ratio for those cards. The only thing you will have to worry about is that single line of credit from the loan you took out. As long as you make those loan payments on time, in combination with your low credit utilization ratio, your credit score will begin to increase.
Keep Old Accounts Open
It’s a good idea to let old accounts get older. Even if you have paid the balance owed on a certain credit card, that card is still included in your credit utilization ratio. If you have two cards with a credit limit of 1000 dollars, and one of them is completely paid off, while the other has a balance of 500 dollars, your credit utilization ratio will be around 25%. But if you close the card that is fully paid, that means that it is no longer included in your credit utilization ratio and therefore your ratio will jump to from 25% to 50%.
Become an Authorized User for Another Card
If you know someone with an excellent credit score and low utilization ratio, you could ask to be an authorized user on their credit card. If that person agrees, that card will be factored in to your credit report. Assuming the card has a very low utilization ratio and you keep it that way by not using it, your credit score will rise.
Taking out loans and applying for credit cards can require a lot of paperwork. Instead of filling out physical forms that are sent to you via fax or email, try using an online, cloud based, document management platform such as PDFfiller to receive and send out documents quickly and easily.