Here at the Funny Money column, we are all about the social media these days, posting the column to all the biggies, such as Facebook and Twitter although, if it would sell more books, I’d gladly put it up on Prodigy.
Success in social media is all about clever headlines, such as “One Weird Trick to Boost Testosterone,” or “One Weird Trick to Cut Belly Fat” or “One Weird Trick to Write Obnoxious, Click-Bait Headlines.” I haven’t had much luck with my attempts, including my favorite which, for some reason, never caught fire: “One Weird Trick to Identifying Lower 12b-1 Marketing Fees on Certain Classes Of Large-Cap Mutual Funds.” Maybe it needed more detail.
So let me try again: “This One Weird Trick Will Boost Your Credit Score Right Now!” That’s better, except that it’s not weird. It’s also not really a “trick,” because it involves nothing more than grade-school addition and division. Still, I don’t think I’ll get hordes of people clicking on, “Improve Your Credit Score With Basic Math.”
Do math and score!
Nonetheless, doing one easy computation can help you immediately improve your credit score, which can lower the rate of interest you pay on mortgages, loans, credit cards and other debt. Your credit score also is used in several states to set your auto insurance rates, and landlords even use it to screen tenants.
What you want to calculate is your credit utilization ratio, which is your total amount of available credit divided by your total outstanding credit balances. If you have $10,000 in available credit and use $8,000 worth of that, it’s going to significantly lower your score, explains Kali Geldis, editorial director of Credit.com.
“Credit utilization is definitely one of the most overlooked and probably the most misunderstood factor in your credit score,” Geldis says. “How you’re managing your credit is a huge part of your credit score.”
While your payment history typically makes up 35 percent of your credit score, your credit utilization ratio usually accounts for 30 percent, making it the second-biggest factor in rating your creditworthiness. People with the best scores (740 or better out of 850) use, on average, just 5.7 percent of their available credit, while those with very good scores (680 to 739) use 27.5 percent, Geldis said. But borrowers who fall into the non-prime category of 620 to 679 use a whopping 63.7 percent.
Don’t take it to the limit
The rule of thumb is to use 30 percent or less of all available credit, and to use less than 30 percent of the available credit on any single card or credit line. Keeping that to 10 percent is even better. You can request a credit limit increase or transfer part of a balance between cards, and those improvements will immediately show up in your score. Geldis recommends asking for any limit increase over the phone so you can ask whether it will cause a hard credit inquiry to be recorded, which can knock five points or so off your score.
With paid-off cards, keep them active with a small monthly charge — such as your newspaper subscription — and have that automatically paid in full each month, to keep your unused credit factored into your score. And, if you can avoid the temptation to run up a balance, keep any paid-off credit lines open to raise your total available credit.
The best part, and the reason why lowering your credit utilization is so effective at boosting your score, is that your credit use constantly is updated and, unlike your payment history, doesn’t reflect earlier activity. The fact that you used 70 percent of your credit nine months ago doesn’t matter. “It won’t hurt you forever,” Geldis says. “Your credit score won’t look back.”
There is one other proven tactic to lower your credit utilization: pay off your balance. It’s not weird and it’s not a trick but, unlike cheap online ploys for attention, it does work.