Credit.com member Steven is a recent college grad who is already on track to building great credit. He wants to do everything possible to make sure his score is as strong as possible. He writes:
I am a recent graduate with a full-time job, and I am doing everything I can to help improve my credit score. I have never missed a payment, and I always pay in full. I have a good mix of accounts — a car loan, a few student loans, and a handful of credit cards.
One thing I want to continue improving is my debt utilization ratio. Right now, it is at about 20% according to my free Credit Report Card on Credit.com. I want to bring it below 10%, as I have read that this is what gets you the maximum score.
I have applied for some credit limit increases, and I always watch how much I spend on my cards. I use them like debit cards. In other words, I never spend more than I have available in my checking account.
I had an idea, and I wanted to ask you if I was thinking through it correctly. Normally, I just wait for my monthly statement to be available then pay it in full immediately. But, I was wondering: If I pay my balance every week rather than wait for the entire month’s statement, will this lower my debt utilization ratio? I am not sure how they calculate it, but I assumed my method will help me lower my ratio.
Credit Score Lifehack for Debt Usage
Steven’s off to a great start and should be congratulated for taking such a proactive approach to his scores. But could he do better if he lowered his utilization ratio?
Utilization ratios are calculated by taking the current balance on each revolving account — as listed on your credit report — and dividing it by the credit limit. If a credit limit is not available, the highest balance ever reported on that account will usually be substituted. Move the decimal point two places to the right after doing this calculation, and you’ll have the utilization ratio. If your credit limit is $1,000, then a balance of $700 results in a 70% utilization ratio, while a balance of $70 results in a 7% utilization ratio.
I used that example for a reason: FICO says that consumers with the highest scores typically use 7% of their available credit. It’s not a magic number though. And the utilization ratio is only one part of your score. So it’s still possible to have a high score overall even though you are using 20% of your available credit on a given account.
Consumers who want to better understand what factors are affecting their credit scores can, like Steven, use Credit.com’s free Credit Report Card to get their credit score and a breakdown of the factors affecting their scores.
My advice to Steven is this: If you still want to try to get this number down, then paying your bills sooner may help. The key here is to try to get a sense of when your issuers report, and that’s sometimes tricky to figure out. Check your credit reports and compare them to recent billing statements to see if you can tell when they are reporting. Some may report at the close of the billing cycle after your payment has been posted, and some may report before or after that.
You don’t have to pay weekly, though. After all, your issuers won’t report information to the credit bureaus weekly. What you do have to do is to make sure the balance reported to the credit reporting agencies is as small as possible.
To do that, you can try to pay your balance in full after the issuer notifies you that your new bill is available, but well before the due date. Then avoid making purchases that push you above that 10% mark until at least a few days after the close of the billing cycle. If you do that, then it’s likely that the balance reported by the issuer will be smaller.
A Strong Credit Score
Another strategy might be to use your cards less for a couple of months and see what it does to your score. If it helps, then you know you either need to try to stay below that ratio on your current cards or add a new one so you can spread out your purchases a bit more.
Before you go to all that trouble, though, you may want to ask yourself what your goal is here. If your score is already high, trying to tweak it may get you a higher score, but no tangible benefits. Remember, the goal of having strong credit scores is to get the best deal a lender has to offer. Every lender has its own standards, but generally there’s not much difference in financing options for someone whose scores are in the high 700s vs. the 800s.
As my fellow Credit.com blogger Deanna Templeton points out, “Lenders aren’t looking for perfect, they’re looking for low risk.”