January 15, 2015 by Lisa Brammer
As we all know, credit scores are used to determine the risk of lending money to a given borrower. Credit scores tell a lender whether you’ve managed your credit responsibly and if you have a history of economic stability.
Credit scores range from 300 – 850 and the higher the score the better. I’ve heard that one of the famous personal finance gurus likes to say he has a credit score of “0”, but that just isn’t possible or desirable especially if you ever want to obtain a mortgage or apply for a loan for a car or other big-ticket items.
FICO scores are calculated based on the following criteria:
• 35% Payment History – Have you paid your bills on time? Late payments negatively affect your score. The later the payment the more it will affect (and lower) your score.
• 30% Amount Owed – How much of your total available credit have you used? Less is better.
• 15% Length of Credit History – How many years have you been using credit? What is the average age of your accounts?
• 10% New Credit – How many new accounts have you applied for recently? When was the last time you opened a new account?
• 10% Types of Credit – Do you have a mix of different types of credit: credit cards, store accounts, installment loans, and mortgages?
Today, I want to focus our attention on the Amount Owed category. It is the second-most important component of your credit score and how you manage it can really make a difference in your score. Let’s say you are person who has a credit card with great perks, so you charge everything you can on the card each month (who doesn’t like free travel?) but always, diligently pays the balance in full, on time each month. No problem, right? Not necessarily.
As a consumer, you may already know the importance of the credit utilization ratio which is the total amount of revolving credit used each month, compared to the amount of available credit. But, did you know that according to bankrate.com it may be calculated on your statement date, not on the due date? So, even if you pay your balance in full each month, a card issuer may be reporting a balance which can skew your utilization ratio, and that can affect your score negatively, especially if you charge a lot each month.
A simple way around this is to ask your lender about when they report balances, then pay yours off (or down) before that date. You could also make payments to your card throughout the month in order keep your balance low or nonexistent. It’s important to know that some credit card companies may limit the amount of payments you make each month. They all will take 2-3 per month, but if you want to pay weekly you might want to check with your lender to make sure they can accommodate this.
Another way to lower your utilization ratio is to ask your lender for a bump in your credit line. I caution you to only do this if you are disciplined enough to not use this newly available credit or else you could find yourself with a decrease to your credit score instead of an increase!
Understanding your utilization ratio and how to use it to your advantage is one way to get the credit score you deserve. I hope this helps.
Founded in 1950, United Credit Service, Inc. is a full service, licensed revenue cycle management and debt collection agency in Wisconsin providing highly effective, customized one on one management and recovery solutions for our business partners. We offer pre-service collection solutions as well as traditional back-end collections. Visit our website at http://www.unitedcreditservice.com or call 877-723-2902.