One Quick Way to Improve Your Credit Score

There are many different factors which go into your credit score, also referred to as FICO score. Your FICO score is calculated depending on your credit report by a formula made by the Fair Isaac Corporation. However, FICO won't actually reveal its particular formula.




Though no one knows just how important each factor is at calculating the credit score, one known factor that plays a sizable role is your utilization rate.

Your utilization 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 utilization 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

Instead of computing your average utilization rate, FICO prefers to measure your score according to 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 utilization rate 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.

Nonetheless, people who had a zero percent utilization rate frequently had really low credit scores. That's because their credit scores were so low, they could hardly even have a credit card.

The ideal is not to have a zero percent utilization rate. If you aren't using your credit cards at all, you are not showing creditworthiness. Keep in mind - creditors would like to know that you'll pay back loans you are taking out, not that you don't take out loans.

Therefore try to get your utilization rate between 1% and 35%. If you have a low balance on one card and a high balance on the other, try balancing your cards out to get your maximum utilization rate down. This technique can very quickly provide you with a credit boost, actually in just a couple of days.

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