In the credit game, you are supposed to lose. If you lose, THEY win. “They” of course, refers to the big Banks and Credit Bureaus. Both of whom benefit greatly when your credit score is lower. The Banks charge you a higher rate of interest and the Credit Bureaus look good to their #1 customer…The Banks!
One of the most complicated aspects of your credit score is what we call “revolving debt ratio”. It’s worth 30% of your score and almost no one knows about it! Keep in mind, your payment history is worth 35% of the score, just to give some perspective on the importance of this component. Your revolving debt ratio is simply the amount of money you owe on your revolving accounts divided by the limits on those accounts.
A revolving account is an account where you don’t have a set payment amount with a set amount of payments to make to pay off the loan. A credit card is the most common example. You make payments based on your balance, which could be as little as zero. So, if you have a credit card with a $10,000 limit, and your balance is $5,000, then your revolving debt ratio is 50%. The credit scoring model measures this on an account-by-account basis and an overall basis.
Here’s the problem: By the time you get your statement in the mail, the credit card company has already sent your balance to the credit bureaus. They do so the day after your statement ending date. So, if you use your card throughout the month, like many of us have been told to do, then pay it off when you get the bill, you are never getting credit for it!!! The bureaus are never getting the information that the account is paid off!
Here’s the solution: Pay your credit card bills before the statement ending date. If you do this, then they will reflect their lowest balance of the month, instead of their highest balance of the month like the Banks and Bureaus prefer. With this component making up such a huge part of your score, it’s likely you’ll see an increase right away without spending more money than you already allocated.
InCreditable Advisors helps you understand How Credit Scores Work, we show you How to Improve your Credit, and we give you the tools on How to Protect your Scores. Call us today at 317.202.1297 to Schedule your consultation or watch our 4 step credit improvement process.