This simple credit card trick can boost your credit score by 50 points or more.
If you’re in the process of rebuilding your credit and improving your credit scores, you may already know that having low credit card utilization rates will greatly improve your credit score.
Credit Card Utilization Rates:
Your credit card utilization rate is basically the ratio of your credit card’s current balance compared to the total available spending limit on the card.
If your credit card had a $10,000 limit and you had an outstanding balance of $2,000 on the credit card, your utilization rate would be 20% ($2,000 / $10,000 = .2 or 20%).
Credit card utilization rates are important in the calculation of your credit score because they’re an indicator of your credit risk. Financial institutions know, on average, that people with high credit card utilization rates are more likely to default on their loans than people who maintain low credit card utilization rates.
Credit Card Inactivity Penalties:
Ironically, paying off your credit card balance completely each month and maintaining a $0 balance can also negatively affect your credit score. A $0 balance reporting on your credit report is an indicator of inactivity and can potentially lower your credit score by 10 points or more.
Ideal Credit Card Utilization Rate:
So what’s the ideal credit card balance utilization rate to optimize your credit score as high as possible?
In my experience, having paid off over $90,000 of consumer debt while tracking my credit scores religiously throughout the process, the ideal balance to keep on your credit cards seems to be less than 7% utilization but more than $0.
In other words, if you’re trying to maximize your credit score, try to keep the balance on all your active credit cards above $2 but no more than 7% of your card’s credit limit ($700 on a credit card with a $10,000 limit.
If you have multiple credit cards, keeping a minimum $2 balance on each card will have the greatest effect in boosting your credit score. However, this strategy is only practicable if you’re really concerned about getting your credit score as high as possible in a short amount of time (less than 2 months).
Most people will be better off paying their credit card balance off each month and not having to worry about missing a credit card payment.