How To Improve Your Credit This Year

When it comes to credit scores there are always going to be problems that only time can heal. For example, consumers with late payments will likely have to wait years before he will fully recoup the credit score points lost when the late payments occurred. However, there are other pieces to the credit puzzle that can be moved in order to affect a positive change much more quickly.

Actionable Strategies

The most actionable way for a consumer to give his credit scores a boost is to focus on his credit card balances or, more specifically, the relationship between his credit card balances and the credit limits on his open credit cards.

That relationship is known your “revolving utilization” or debt-to-limit ratio.  Revolving utilization is calculated by dividing credit card balances by credit card limits, which is done both in aggregate and card-by-card.  The closer your balances are to your credit limits, the lower your scores will be. If you have the ability to write a check and pay off or pay down your balances you can improve your scores in less than a month.

How to Lower Revolving Utilization

There are two ways a consumer can effectively lower his revolving utilization ratio. The first way is for a consumer to lower his credit card balances. The second way to lower revolving utilization ratios is for a consumer to raise his credit limits. Here is a simplified example of each method.

If John Doe has a credit card with a limit of $1,000 and he owes $600 on the card then his revolving utilization ratio would be 60%. If he were to pay the card down to a balance of only $200 then his new revolving utilization ratio would be reduced to just 20%. The result would almost certainly be a positive credit score boost.  If you have the ability to write a check and pay off or pay down your balances you can improve your scores in less than a month.

Paying off credit cards is generally the best move that any consumer can make for both his credit scores and his finances. However, consumers often find themselves in more credit card debt than they can afford to simply pay off in one fell swoop. Although paying down credit cards is the best way to lower a consumer’s revolving utilization ratio, it is not the only way. Consumers can also lower their revolving utilization ratios by raising their credit limits.

In the example above, if John Doe were to call his credit card company and request a credit limit increase then, assuming that the request is granted, he could lower his revolving utilization ratio without actually paying down his credit card balance. In fact, if his credit limit were raised to $3,000 then he would achieve the same 20% revolving utilization ratio that he would have achieved in the previous example by paying the balance down to $200.

Timeline

Month 1: Stop Overspending

The first step to improving your credit scores through lower revolving utilization ratios is to stop spending more than you can afford to pay off in any given month – immediately. In fact, spending should be reduced as much as possible in order to free up additional funds to begin paying off existing credit card debt. Month 1 is really about stopping the damage more so than improving scores.

Month 2: Pay Down As Much Credit Card Debt As Possible

Begin making a habit of paying off as much credit card debt as you can each month. As a rule, it is best to attack the lowest credit card balances first and move your way upwards to the higher balances next. This will eventually result in you receiving fewer statements, which is very empowering and tangible evidence that your strategy is working.

Month 3: Increase Credit Limits

Once you have paid off a reasonable amount of your credit card balances then your credit scores have likely taken a step in the right direction. If your credit reports and scores are in good shape (other than your credit card balances) then calling your credit card issuers to request credit limit increases might be a good move.

Months 4 and Forward:

Continuing paying down your credit card debt as much as possible each and every month. Commit to not stopping until you have paid each and every card down to a $0 balance. Once you have achieved this goal – congratulations! Your credit scores will almost certainly have seen a very significant improvement. You can maintain your scores by never charging more than you can pay off in any given month.

Want more? Read “How To Improve Your Credit This Year: Part 2”