CREDIT SOLUTION PROGRAM | BY: HANK COLEMAN
It’s not always easy to boost your credit score quickly. Often, it takes some time and a little bit of work. But, if you have one or more maxed out credit cards or you run a high balance on your credit cards, then these simple tactics can boost your credit score fast.
The problem with having high balance is your debt ratio or sometimes what the credit bureaus call the utilization ratio.
Your debt ratio accounts for 30% of your overall credit score according to models used by the nation’s three credit bureaus and the Fair Isaac Corporation, which created the industry standard, FICO Score. The debt ratio is the second most important factor the credit bureaus use to calculate your credit score behind making your payments on time.
The good news is that improving your debt ratio is very easy to fix, and it is actually the quickest “credit killer” you can fix that will have the most impact on your score.
So what exactly is that the debt ratio? The credit bureaus determine your debt ratio by dividing your available credit limit and how much of your credit cards’ limits you use.
Let’s say you have a credit card limit of $10,000. If you use $5,000 of that credit limit, you have a 50% utilization ratio. Now, that’s not too bad, but it’s not great either. Ideally, you want your utilization rate to be below 30%. Below 10% is even better.
So how do you accomplish getting your utilization rate below 30%, let alone below 10%? There are a couple of ways to get your utilization rate down fast.
First, you can transfer the balance of one of your credit cards to a new or existing credit card. By moving a high balance credit card to a lower balance credit card, you are lowering your use of available credit.
Of course, this isn’t really changing your utilization rate. The three credit bureaus– TransUnion, Equifax, and Experian– look at your total available credit and credit card balances. Moving balances from one credit card to another won’t change your total debt balance and credit limits; it simply shifts them around. But, you might see a change for a month while your credit report catches up to new data provided by your lenders depending on who reports first.
Quick side note: if you have any existing debt this can actually help you save on your APR as well.
Another way to lower your utilization rate is to pay down the balance that you run on your credit card. Paying down your balances can take longer, and you won’t see your score boost quite as quickly. However, it’s an effective long-term strategy to reducing your utilization rate and raising your credit score.
Realistically, taking care of your debt ratio is the highest leverage point in your credit. Why? Because with some parts of your credit it takes a certain period to improve them no matter what. That’s just the way it is. For example, a negative report on your credit score such as a late payment or bankruptcy stays on your credit report for seven years.
However, with your debt ratio or utilization ratio, you have the power to make a huge change fast. You can see your score go up 30 to 50 points or more within just 30 days because you are reducing your debt while keeping the same amount of available credit, improving the ratio.
Most people think that late payments are the only thing involved in calculating your credit score. But, that’s not the case. The credit bureaus and the Fair Isaac Corporation use several factors such as the type of credit, the length of credit history, on time payments, utilization rate, and credit report pulls from lenders in their proprietary algorithms to determine your credit score.
Another strategy to reduce your utilization ratio is actually to increase your available credit. Many financial experts don’t want to admit this because increasing your available credit is risky, and you may find yourself tempted in spending more on your credit cards. But, if you make your payments on time, your lenders might not have a problem with this strategy. You can send the request through email or calling your lender’s customer service line.
But, like all ratios, there are two sides to the equation. Your utilization ratio is calculated by dividing the amount of debt by your available line of credit. If you increase your available credit without adding more debt, the ratio will decrease. It’s simple math. If we continue with our scenario from above, if you have a credit card limit of $10,000 and use $5,000 of that credit limit, you have a 50% utilization ratio.
But, if you call your credit card company and ask for them to raise your credit limit to $12,000, for example, your new utilization ratio is 42% ($5,000/$12,000=42%) assuming that you don’t add more credit card debt to your balance.
Keep in mind though, if you want a high credit score in the short-term, don’t cancel a credit card or request to your credit card company to lower your credit limit in the hopes that you won’t spend too much on your credit cards by doing so. Canceling a credit card has an immediate negative impact on your credit score because you are reducing your available credit. Your utilization ratio will drop if you lower your credit limit or cancel a card.
Canceling a card is great for the long-term and will help you get your debt under control. But, if your goal is rapid credit score increase, don’t cancel a credit card.
Finally, look for errors in your credit report. You should request a copy of your credit report from each credit bureau at least annually. You should ensure that all of your personal information, loans, and credit cards are listed on your credit report accurately.
You should dispute any inaccuracies that you find directly to with credit bureau. All of them have ways that you can report discrepancies and errors directly on their website. You should also ensure that the credit bureaus remove any old negative marks over seven years olds from your credit report. Don’t let them just linger.
Reducing your utilization ratio is more complex than you think. But, thankfully, it is the easiest credit killer to fix, assuming you use a few strategies. By getting a balance transfer, paying down your balance overall, fixing errors in your credit report, or opening new lines of credit, you can quickly boost your credit score.
Not all elements of your credit score are the same. It helps to know focusing on which ones will skyrocket your credit score the fastest.
