Is 731 A Good Credit Score – Credit Card Usage And How It Affects Your Credit Score
Is 731 A Good Credit Score – Whats The Best?
Credit scores can be so mysterious because what goes into building up your credit score sometimes can feel really hidden and we can be actively working on our credit, but it feels like it’s getting nowhere because we don’t know what’s going on.
0:08 Why credit scores are mysterious
0:26 Credit utilization – how much credit you’re using
0:39 The more credit you use, the lower your score
0:56 How much your score is impacted
1:22 Example of credit utilization
2:46 30% rule
3:03 10% rule
3:45 Best way to manage your credit card
4:20 Why pay off credit card and leave a SMALL BALANCE
So one of the biggest things that impacts your credit score is your credit usage or what’s called your credit utilization.
Basically this is how much credit you are using compared to how much of a limit you have.
So does your credit card have a $5,000 limit? If so, how much of that are you using?
The more credit you use, the more your score will decrease.
Credit utilization impacts your score by 30%.
In other words, credit utilization has a 30% influence on your credit score.
So let’s run through an example here.
You’re using $750 out of the thousand dollars that you’re allowed to use. Now to a credit card company, you’re using a pretty high percentage of debt compared to the limit they gave you.
Creditors see this as a bad thing because this means you have less available to you and you’re getting close to the limit that you’ve been approved for.
And so what ends up happening is anything above 30% usage actually starts to harm your credit score.
So what we want to do to bring the credit score up higher is we want to get that usage down to below 30%. So let’s say you start working on paying this off and you get this down to below 30%.
So if you get that debt below 30%, your credit score is going to start increasing because 30% is one of the statistical markers that’s going to help increase your credit score.
Let’s say you continue to pay off this credit card debt, and now we’re at 10% usage and below. At this point, your credit score will start increasing even more. So utilization and your credit score work sequentially.
So when you’re above 30% your credit score is going to drop down a little bit. When you’re below 30% it’s going to start to increase a little bit.
When you drop below 10%, it’s going to increase even more. So what you want to do when you’re managing your credit card is get this debt as low as possible without getting to zero.
So you want to keep a little bit on your credit report, um, but you want to get that below 10% that way your credit score benefits. And what this shows the creditors is that you have a lot of credit available to you, but you don’t have to use it.
This is their indicator for how you’re using debt effectively. Now, the question is “what’s the best way to manage your credit card using moving forward and making sure you use your utilization correctly?”
What we want to do is make sure that your credit card has one use.
If you’re really good at budgeting, you might be able to take a credit card and have multiple uses out of it. But we want it to be a one use here.
So what you might do is you might take this card and you say, “this card is only for gas.” Then you’re going to pay off that balance every month except for a few dollars.
You want to pay off your credit card regularly that way you don’t collect interest every single month, but you don’t want to bring that all the way down to zero.
And the reason why is because your credit card is only going to report once a month. Now when it reports, we don’t want it to report zero because then it’s going to seem like there’s nothing on your credit card and that your credit card’s not being used.
We want to make sure there’s a few dollars on there. So what’s being reported is that you are using credit. And then also you want to make sure that what you’re spending on your credit card fits in your budget.
So as soon as I spend that money on my credit card, I have that money earmarked for when that statement comes due, I’m going to pay it off immediately.
That way I always have the money there. It’s never a surprise. And then I’m able to track what’s in my bank account and what’s on the credit card at the same time.
So just to recap, keep your credit card balances (i.e. your utilization) below 30% if you can, and then continue to work to pay that down to get below 10% to help build your score up.
Hey, my name is Kyle and I’m a Mortgage Advisor serving Tennessee, Florida, and Ohio. My goal is to help you get a crystal-clear home loan that helps you win the house you love. If you’re ready to create your home-buying plan, you can reach me through any of the ways below:
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