With Black Friday and the shopping season right around the corner, you should start to worry at least a little about your credit utilization ratio. If you didn’t know it yet, the way you take care of your credit utilization ratio counts for 30% of your FICO score. You could say it’s pretty important.
During holiday season, people tend to max out their cards. With all the discounts, presents and other cool stuff, it’s easy to lose yourself and lose count. Even if you pay off your credit card balance in full, your score is still going to take a hit. Because exceeding a 30% credit utilization ratio in a billing cycle will indicate to your credit card company that you’re likely spending a lot of your monthly income on debt payments and are at a higher risk of defaulting on your payments.
So, if you want to enjoy the goodies that come with the shopping season and also have a good credit score, here’s what you need to do:
1. Balance alerts
People usually have so many things on their minds that they tend to forget about their balance. Although, as I said before, it is very important. Fortunately, we now live in the age of computers and, if you ask your issuer, you can receive balance alerts via text or email. This way, you’ll know exactly when you’re getting close to that 30% threshold.
2. Increase the limit on your credit cards
Let’s say you have a current credit limit of $5,000. You may get a raise and change your spending habits. If the new you now spends about $2,500 each month, you should think about raising your credit limit. Go from $5,000 to $10,000. Your credit utilization ratio will drop from 50% to 25%. You won’t have to change your spending habits, you won’t have to get a new card, you won’t lower your credit score and you won’t lose money. But, remember! Just because you have a new, higher credit limit, it doesn’t mean that you should spend even more. You do have to pay back what you owe, so try to remain a responsible credit card user.
Requesting a credit line increase might result in your issuer initiating a hard inquiry to your credit report. This will lower your score, but only by a few points and just for a little while. If you continue to be a smart user, your score will bounce back in no time.
3. Keep track of your purchases
Keeping track of how much you spend is the easiest way to avoid damaging your score. Check your online accounts every week or so, and change credit cards when you notice you’re approaching 30% on one of them.
Make it a rule to keep the balance on all of your cards below 30%!
4. Find out when your credit card issuer reports to the credit bureaus
Credit card issuers usually report their client’s payment activity and balance to the credit bureaus at least once a month. If you find out the exact date, you’ll also be able to pay off as much as you need so that it won’t look like you’re carrying a high balance. Your credit score will thank you.
5. Paying your balance twice per month
Maybe these tips are too much to handle all at once. You can get around them with a simple trick: paying your balance twice per month. Just remember to always keep your credit utilization ratio below 30% and you’ll be fine.
Taking care of your credit utilization ratio will help you improve your score. It will discipline you and it will make you more financially responsible. You only stand to win from doing it.