Boosting Your Credit Score – Keep your Debt to Available Credit Ratio Low + Oldest Cards Remain OPEN!
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What is the number one way of boosting your credit? The simplest answer is to pay off your debt.
Easier said than done, right? Right.
I like to imagine that my credit score is like my driving record. If I constantly speed, get multiple tickets, moving violations or cause accidents, my car insurance will go up. Simple as that.
If I am a good driver, slow and steady, do not cause accidents etc, my premiums will be lower. Same principal applies to credit scores, folks! If I make my loan/credit card/mortgage payments ON TIME, my credit score will reflect my good behavior. Be consistent and responsible with your credit.
One of the most effective ways to build your credit score is to maintain a healthy ratio of total credit to available credit. Depending on who you ask, that number should be 20%-30% of what you have available to you.
30%
Let’s say I have a $10,000 limit on one of my credit cards. For this card to help BUILD my credit, the balance needs to stay AT or BELOW $2,000 – $3,000, a 20-30% ratio. When applying for a loan or a credit card and the lender pulls your credit history, one of the things they are looking is how much debt you have available in your name, compared to the amount of debt you actually owe.
If you owe more than you are able to pay, or if you are maxed out on your current loans/credit cards, you may not get approved for a new line of credit, or the interest rate may be so astronomically high that using said credit would land you in an even worse position financially.
Would YOU loan money to YOU?
If you charge everything on your credit cards like I do every month, you may want to make a random mid-cycle payment to keep that balance low throughout the statement cycle on a monthly basis. If your available credit on that card is high enough and you pay your bill in its entirety every month, this may not matter.
While paying off your debt completely will be the most beneficial way to build your credit score, as you accomplish this goal (work it girls and guys! 😀 ) DO NOT simply start closing credit cards as you pay them off. There is an art to opening and closing credit cards, just like there is an art to keeping a healthy ratio of debt charged.
You want to keep your OLDEST and in GOOD standing credit cards OPEN. This shows that you have a looooooong history of responsible financial decisions. Timely payments and responsible spending all cast you in a positive light to lenders. Do not, under any circumstances, destroy – ie: close – your longest (in good standing) line of credit. Why would you rob yourself of positive history?
Opening AND closing credit cards also dings your credit score
Basically anything you DO or DO NOT DO will affect your credibility to lenders. If you have a lot of cards – more than 3-4 or so – you will want to pay off the smallest balances first, then consider closing one card at a time (remember to KEEP THE OLDEST CARD open) giving your credit score some time to rebound in between the closing of the cards.
I personally have two credit cards in my name. One I have had since shortly after I graduated high school and the other I use the majority of the time. If you let one card sit dormant and with a zero balance long enough, the credit card company may decide to close that account for you, so every so often I charge something on either of the cards to keep them active and in good standing – paying them off before charged interest on the amount owed.
We will continue this Financially Savvy series with more tips and methods to boosting your credit score including WHEN to pay your credit cards, the best way to go about shopping around for a home loan or car loan interest rates, what types of items you should NOT charge and more.
I hope you enjoy and find these useful!
Disclaimer: Note that I am just an average girl, working my butt off to pay down my mortgage and afford nice things. I do not have a degree in finance, these tips are what worked for Paul and I and our credit scores. You should, of course, make all of your own financial decisions and seek an adviser if you have financial questions. Use our advice at your own risk. I have to say it. 😉
