One Fast Way to Improve Your Credit Score
There are several aspects which go into your credit score, also referred to as FICO score. Your FICO score is computed depending on your credit report by a formula made by the Fair Isaac Corporation. However, FICO doesn't actually reveal its particular formula.
Although nobody understands exactly how important each factor is at determining the credit score, one known thing that plays a sizable role is your utilization rate.
Your rate is basically "how much of your available credit have you been using?"
The theory is that if someone has credit lines of $10,000 and they're using $9,500 of that credit, they're a much bigger credit risk than someone who's only using $1,000. Therefore, their credit score would be lower.
However, there are a few things about the way FICO calculates your rate that are a bit strange. One small loophole in particular can result in you being able to quickly boost your credit score without actually having to reduce your credit balances.
==> The Odd Thing about Credit Utilization
As opposed to computing your average utilization rate, FICO decides to measure your score based on your highest utilization rate.
For example, let's say you have two credit cards. Both of them have a $5,000 limit. One card is maxed out, while another card has a balance of zero.
In this case, your maximum utilization rate would be 100%. In this case, your credit score will be severely negatively impacted.
On the other hand, if you had distributed your credit balance half and half over the cards, your maximum utilization would be only 50% each.
Another example would be if you had one card with a $1,000 limit and another card with a $5,000 limit. If you had to charge $800, it's a much better idea to charge it to the $5,000 card.
==> A Few More Things to Know about Utilization Rate
The ideal is 35% or under on all your cards. Having even one card above 35% will drag your max utilization up.
In an independent study of 70,000 different credit scores, researchers found that people with 720 or higher credit scores tended to have utilization rates of 20% or less.
However, those who had a zero percent utilization rate often had very low credit scores. That's because their credit scores were so low, they would not even get a credit card.
The right is not to have a zero percent rate. If you aren't using your credit cards at all, you are not showing creditworthiness. Keep in mind - creditors need to know that you're going to pay back loans you take out, not that you do not take out loans.
So try to get between 1% and 35%. If you have a low balance on one card and a high balance on the other, try managing your cards out to get your highest utilization rate down. This one technique can very quickly offer you a credit boost, actually in just a day or two.
Although nobody understands exactly how important each factor is at determining the credit score, one known thing that plays a sizable role is your utilization rate.
Your rate is basically "how much of your available credit have you been using?"
The theory is that if someone has credit lines of $10,000 and they're using $9,500 of that credit, they're a much bigger credit risk than someone who's only using $1,000. Therefore, their credit score would be lower.
However, there are a few things about the way FICO calculates your rate that are a bit strange. One small loophole in particular can result in you being able to quickly boost your credit score without actually having to reduce your credit balances.
==> The Odd Thing about Credit Utilization
As opposed to computing your average utilization rate, FICO decides to measure your score based on your highest utilization rate.
For example, let's say you have two credit cards. Both of them have a $5,000 limit. One card is maxed out, while another card has a balance of zero.
In this case, your maximum utilization rate would be 100%. In this case, your credit score will be severely negatively impacted.
On the other hand, if you had distributed your credit balance half and half over the cards, your maximum utilization would be only 50% each.
Another example would be if you had one card with a $1,000 limit and another card with a $5,000 limit. If you had to charge $800, it's a much better idea to charge it to the $5,000 card.
==> A Few More Things to Know about Utilization Rate
The ideal is 35% or under on all your cards. Having even one card above 35% will drag your max utilization up.
In an independent study of 70,000 different credit scores, researchers found that people with 720 or higher credit scores tended to have utilization rates of 20% or less.
However, those who had a zero percent utilization rate often had very low credit scores. That's because their credit scores were so low, they would not even get a credit card.
The right is not to have a zero percent rate. If you aren't using your credit cards at all, you are not showing creditworthiness. Keep in mind - creditors need to know that you're going to pay back loans you take out, not that you do not take out loans.
So try to get between 1% and 35%. If you have a low balance on one card and a high balance on the other, try managing your cards out to get your highest utilization rate down. This one technique can very quickly offer you a credit boost, actually in just a day or two.
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