A friend with a new credit card wonders why her credit score fluctuates from month to month. She wants to buy a house, and she has embarked on a serious credit-building regimen that includes monitoring her scores. She hasn’t missed a single payment, and the ups and downs have her baffled.
Best guess is that she is unaware how a high utilization rate affects those treasured scores. Some months she runs right up to her credit limit, and then she pays down the balance to zero by the due date. Other months she uses more than half of her credit limit and then makes minimum payments on time for a while until her balance is low again.
Financial wizards tell us to use only a modest percentage of our revolving credit. It’s called your utilization rate. Some put the magic number at 30 percent, while others set it even lower. I’ve heard as low as 10 percent. Aim for 30 percent to see what a difference that makes in your score. Your credit rating will improve as your utilization percentage drops.
Some credit card issuers report the balance on your statement to the credit bureau even if you pay in full every month. If keeping up with your billing cycle is a source of endless confusion for you, make several payments during the month to hold down your balance. Pay down your balance, and keep it down.
Just how important is low utilization? The folks at the Fair Isaac Corporation who calculate FICO scores are said to give 30 percent weight to balance. The other biggie factor is payment history at 35 percent. Neglecting to pay those credit card bills on time or even –forbid! —skipping a month can really hurt your credit.
Here are strategies to build a better credit score and show that you are creditworthy:
Make all payments on time.
This applies to all your bills, not just credit cards. Think utility bills and cable bills. Unpaid creditors may sell your debt to a collection agency, and that development will seriously damage your credit. No collections ever!
Keep your balance low.
Try to pay in full each month and shoot for no more than 30 percent utilization of your revolving credit.
Don’t open too many new accounts at once.
New accounts lower your average account age, which counts for 10 percent of your credit score.
Keep older accounts open.
Leaving active older accounts that don’t charge annual fees improves your length of payment history. Credit history weighs 15 percent in calculating your credit score.
Check your credit reports regularly.
Experts say keep an eye out for errors and discrepancies with an annual checkup. Monitoring your scores even every month isn’t too much if you are trying out strategies to build credit.
Read More: Get a free credit report annually from each of the three credit bureaus at annualcreditreport. Or check out free scores available at Credit Karma, Bankrate, NerdWallet and a growing number of other sites. Discover Scorecard offers free Fico scores.