When it comes to monitoring a credit score, it is important to pay all bills on time and not max out a credit card when relying on one for holiday spending. However, another factor, known as the credit utilization ratio, plays a major role in a consumer’s FICO score. In fact, this number accounts for 30 percent of the average consumer’s FICO score, and it is the second most important part of a person’s credit score next to paying bills on time.
To figure out what this score is, the consumer needs to add up credit limits across all his or her credit cards and then add up the outstanding balance on each card. Divide the total balance owed by the total limits and multiply that by 100 to determine the percentage or credit utilization ratio.
Most financial experts advise that a consumer should not use more than 30 percent of the available credit on any given credit card. Ideally, the lower the usage of the card, the better the person’s credit score. Most consumers who have excellent credit scores have utilization ratios under 30 percent. If it is a consumer’s goal to improve his or her credit score, it may pay to do a few calculations to determine what his or her utilization ratio is and where he or she wants it to be.
Several tips are helpful in improving this ratio and the overall credit card balance. Most credit card companies report balances to credit bureaus once a month, and many times, this report can happen just after a consumer makes a big purchase and has not had a chance to pay it yet, which will make the utilization ratio high. One way to counterbalance this is to make multiple payments over the month on the credit card instead of only paying the balance once a month. Doing so will keep the utilization ratio consistently low.
The higher the credit limit on the card in relation to the balance, the lower the cardholder’s utilization ratio will be, which is why it is a good idea to ask for a credit limit increase every now and then. If the consumer has been a good customer, the credit card company may do this automatically, although it does not hurt to ask.
One way to keep the balance down on the card is to use the credit card’s rewards points or cash on purchases. Many cards offer rewards programs that give the cardholder either cashback or the ability to redeem points for gift cards. If the consumer plays his or her cards right, these points can come in handy when it comes time for purchasing Christmas presents or making other big purchases. The cardholder can accumulate these points over time to take advantage of the rewards offered, letting them cash in on these benefits just before holiday shopping time.
If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.