Credit Card Utilization and How it Impacts Your Credit Score

What is credit card utilization?What is Credit Card Utilization?

Thirty percent of your credit score is established by credit card utilization, which is the ratio of your outstanding balances on all revolving credit accounts, compared with the credit line on those accounts. There is another way to look at it. Your credit card utilization ratio is the portion of your offered credit that you are utilizing. This is your credit card debt split by your credit limit.

If your utilization is 30% if you have a balance of $3,000 on a credit card with a $10,000 restriction.

Exactly how your credit card utilization calculated?

Your utilization rate is made use of 2 methods computing your rating– on accumulation (the amount of all your balances separated by your overall credit line) and also independently (the same ratio for each and every single card). Credit experts have identified that the greater balance you have about your credit limit, the more probable it is that you back-pedal default.

What is an excellent utilization rate?

An excellent credit utilization price would certainly be much less than 10% of all combined accounts. Generally speaking, a credit utilization rate of 20% is respectable. Once your credit utilization goes above 40%, your credit score will suffer.

Exactly how Your Debt-to-Credit Ratio Affects Your Credit Score

The expense of high utilization results in a reduced credit score which will increase your interest rates. If you have a 630 credit score, your credit card interest will be around 18% or higher.

Just how can I lower my credit utilization?

Having the lowest credit utilization ratio possible is ideal. A high debt-to-credit ratio will decrease your credit score.

Credit Fast Tip: Pay Off Existing Credit Card Debt with Balance Transfer Credit Cards with a fixed low-interest rate.

Along with maintaining your budget, you could reduce your credit card utilization ratio by raising your credit limit. Your credit card company will usually raise your credit limit if you have not asked for a credit line increase in 6 months. If raising your credit limit will simply attract you to spend more money, it is imperative you avoid this method of lowering your credit utilization.

Whether the line of credit for your credit card is $2,000 or $10,000, that number had not just appeared out of thin air. When you made an application for the credit card, your bank most likely checked out your economic history. The bank will then assign you a credit limit. This is based upon your earnings, your credit score, and your debt-to-income ratio.

Exactly what’s the excellent debt-to-credit ratio for credit cards? FICO recommends that an excellent debt-to-credit ratio portion is listed below 30%.

Our suggestion is to enhance your credit score by repaying balances as well as targeting a credit card utilization price of much less compared to 20%.

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Repair Bad Credit – How to Fix Bad Credit?

How to Repair Bad Credit?

Excellent credit, really bad credit, no credit at all! Listening to commercials on radio and television make it sound like credit ratings don’t matter and that it’s a cinch to repair bad credit if you need to. Think again!

What makes your credit bad? Many different things can count against you in making up your credit score that you may never even have considered.

1. If your ID has been “borrowed” and used to buy a house, car or open accounts without your knowledge, you may have lost your good credit through no fault of your own. Clearing up Identity theft is not easy; it is better to prevent it from happening at all.

2. Pay your bills, the full payment, and on time each month. If you are late with your mortgage payments, this will impact your credit profoundly. Don’t skip credit card payments. Do your absolute best to pay everything on time to keep your credit in the “good” column. A history of late payments is considered Bad Credit and a person who pays late is a bad risk for credit or a loan.

3. Collection agencies can be a problem and not just because of sending you collection letters or making aggravating telephone calls to you during dinner. Of course, the number one reason is that you did not pay a bill. However, there are times when not paying the bill was the correct thing to do (such as when a medical bill is coded wrongly, and you are charged for services when you should not be). Paying an old collection bill because it just “won’t go away” can adversely affect your credit, too. Collection agencies accessing your credit reports negatively reflect on your credit score.

4. Don’t apply for too many credit cards, loans, store cards, or other sources of credit that cause your file to be accessed multiple times by banks or lending companies, you are hurting your credit without meaning to do it.

5. Parents, relatives and good friends often find their credit affected when they co-sign for credit for someone else. The old saying “neither a borrower nor a lender be” by Ben Franklin was good advice, and it goes for co-signers, too. Parents are especially vulnerable to this when they decide to cosign for a child to have credit cards or a car when they go to college. Remember when you co-sign for someone that you are saying that you will pay the debt in full if the borrower defaults.

Repair Bad Credit Lowering Credit Debt

If you already have poor credit and are in need of money or credit for purchasing, be careful when considering loans advertised for those with bad credit. These companies often charge exorbitant fees as well as the highest interest rate permitted by law. I don’t need to say (but I will) that you should never, never borrow from a payday loan company.

Bad credit can affect your insurance rate (yes, the insurance companies consult the credit reporting agencies, too). Your utility company may require a large deposit from a person with bad credit before turning on the lights, water, telephone, internet or cable. Landlords run credit checks, too. You can be denied an apartment or house you want to rent depending on your credit score.

So, how do you repair bad credit history?

  • Pay your bills on time ALL the time.
  • Do not miss payments on a loan or credit card.
  • Pay your credit card bills in full every month and do it on time.
  • Monitor your credit for identity theft.
  • Pay all debts in full including medical bills so that you are not reported to the
  • credit reporting companies.
  • Don’t change jobs, phone numbers, mailing address often. Constant moving can adversely affect your credit.

If your credit is already bad, do your best to clean it up by repaying all past unpaid bills. You can negociate to lower the amount you owe.

How do you repair bad credit? You can, but it is far from as easy as the people say on T.V. commercials. There are attorneys whose firms “specialize” in credit repair but you don’t have to pay someone to repair your credit; you can do it yourself. How?

First of all, lenders are afraid to lend even the smallest amount to someone with bad credit. Your track record shows that you cannot be counted on to make the necessary payments on time or they will charge you the highest interest allowable. You need to fix your credit. Try to improve your credit score.

fix bad creditavoid debt relief companies to repair credit

Many so-called “debt relief” companies are scams. These companies are supposed to negotiate with the companies you owe to get the payment reduced. You can do that yourself. Companies don’t want to and can’t afford to lose the money you got from them, and they employ people to find a way that you can afford to pay. If you feel you cannot do this on your own, be certain to find a reputable company with which to deal.

Consult your credit report to see what it is that is causing your bad credit score. If there is erroneous information on it, use a dispute form to have it corrected.

Sit down and make a list of all of your debts, when you opened the account, how long since you opened it, your highest amount owed, payment amount and schedule and how much you need to pay each month. If you are behind on your payments, figure out how much and when you started getting behind.

Contact each company and make arrangements for a new payment schedule to begin for you to pay off the account. Most companies will cooperate with you and help you repair bad credit.

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Credit Gardening and Raise Credit Score

What is Credit Gardening?

Credit gardening is merely nurturing the accounts you’ve obtained while avoiding making applications for brand-new credit accounts for a particular amount of time. A person should demonstrate this behavior for at least six months. Ideally, you will want to credit garden for at least one year to see better results.

Credit Gardening – Plant the Seeds for Good Credit

Plant the seeds. Begin with some favorable, credit trade accounts on your credit file. Having four accounts, consisting of some credit cards is excellent. The ideal mix would be three credit cards and one installment loan account.

It is recommended to have more than just credit cards on your credit report. Credit mix calculates 10% of your credit score. Have a variety of credit types. Different credit types will improve your credit score slightly.

An example of an installment account would be a car loan or a personal line of credit. These installment credit accounts have specific time limits. A car loan may be for a five-year term. A personal line of credit may have a one-year repayment term.

Need to Establish new Credit Accounts, but Have Bad Credit?
Credit Fast recommends the following offers to build credit when Credit Gardening. These products have been proven to be obtainable at nearly all credit levels.

Secured Credit Card: Discover it® Secured Credit Card is not for those currently in the process of bankruptcy. Discover will do a hard pull credit inquiry.

Installment Loan: Self Lender Credit Builder helps people add an installment loan to their credit mix. The Self Lender program works by establishing a small secured loan that the customer makes monthly payments on. All payments report to the credit bureaus. The client then pays the loan in full the funds are released back to them. Self Lender will do a soft pull credit inquiry with no impact on your credit score.

Credit Gardening and Improving Credit Score

Credit Gardening Technique – Raise your Credit Limits

Raise your credit limits, and that will increase your credit score. When you have a high amount of available credit that you do not use it will help to raise your credit limit. Credit bureaus take into consideration part of your credit score for what they call credit utilization. If you have high amounts of unused credit compared to used credit to them, it demonstrates that you practice responsible financial skills.

You will need to see how your credit card company makes that decision to increase your credit line. Some credit card companies will only perform a soft pull while others will carry out a hard pull on your credit report. Sometimes you can find that information online when you log into your account. If you cannot find a clear indication of how they determine your credit limit increase you can always call the number on the back of your credit card. A customer care representative should know the answer to this question. Many times credit card companies that offer free credit monitoring services with their credit cards will perform soft pulls.

Credit Gardening Tip: Ideally, you do not want to use more than 30% of your available credit. Even better you should not use more than 9% of your credit line but use your credit. If you have 0 balances on your credit accounts for six months, you are not credit gardening. Make small purchases on each credit card to show account activity. The idea here is to demonstrate responsible credit habits. Typically in six months, the average consumer will begin to see positive results.

Utilization of Credit & How it Impacts Your Credit Score

Credit Limit Credit Balance Utilization %
$5,000 $2,500 50%
$30,000 $2,500 8%

 

Credit Gardening – Avoid the unexpected weeds of a Hard Pull

Be careful even if you plan not to apply for credit a hard pull can still appear on your account. You want to avoid any actions that will result in a hard inquiry on your credit report. Most people don’t think about when they open a new cable, cell, or Internet account; a hard credit inquiry may be performed. When a customer service representative asks for your social security number, you need to ask if they will carry out a hard pull on your credit file. Make sure that individual knows for an absolute certainty. If you have any doubts, ask to talk to a supervisor.

Freeze and Halt Credit Bureau Inquiries

To make sure that no credit inquiries are made on your credit file you have the option to put a freeze on your credit. There is a cost for this service, however, and you would have to notify each credit bureau individually. The cost of this would amount to $5-$10 per credit bureau. I would not recommend this course of action unless only to avoid the temptation of applying for new credit.

Freezing your credit score also would prevent anyone else from attempting to open an account in your name. This freeze can prevent identity theft. This service can be a little pricey at up to $30, but if you seriously intend not to initiate any new trade accounts for one year or more, this credit gardening tactic may not be a bad investment. Keep in mind this would include all forms of credit not just for credit cards. So if you plan to buy an automobile in six months, you may not want to perform this credit freeze action.

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