Credit scores are somewhat like IRS tax codes: we know they're important; few folks fully understand them; and failing to successfully deal with either can cost you a lot of money. While most of the factors determining your credit scores, such as payment history, number of open accounts, and type of accounts, take months or years to improve, there's one neat trick that can hack your way to better scores in just a month.
No, we're not advocating breaking into Experian's, Equifax's, or TransUnion's computers. (That's already been done!) This tip is far simpler, and boils down to timing.
About 30% of your credit score is based on credit utilization, which is the industry term for the ratio of credit card balances to those accounts' limits. Higher credit utilization equals lower scores. For example, a $1,000 balance on a card with a limit of $5,000 would be 20% utilization, a low ratio that would boost your credit scores. A $500 balance on a card with a $500 limit, however, would be 100% utilization, a significant derogatory factor to scores. Utilization ratios under 10% are ideal.
"But wait," you say, "I pay my balances in full every month, so my utilization must be 0%, right?" Not so much. It's a common misconception that paying your credit card balances off in full every month maximizes your credit scores. However, it's not just whether or not you pay them off, but also WHEN you do so.
Creditors report consumers' data to the credit bureaus monthly. They send that data when new statements are generated, so your credit card statement balances determine your credit utilization ratios. Paying your balance in full AFTER the statement comes out doesn't impact your scores, even if you avoid carrying a balance to the following month.
One simple change, however, can up your scores considerably: merely paying your balances off (or down) BEFORE your statements are generated will lower your utilization ratios and raise your scores.
The exact amount this "hack" will raise your scores depends on your credit profile. A consumer with prior late payments, charge-offs, and collections won't see much improvement. Those with good credit histories, however, can see significant gains.
I'm a loan officer, and my clients' scores make a huge difference in their mortgages' pricing, and sometimes determine whether they even qualify for a home loan! My credit vendor's scoring simulator lets me model the potential impact credit card balances have on credit scores. While every credit profile is different, here are two recent examples (in which borrowers' names were changed for their privacy):
- Bob had a 659 TransUnion score, and a balance of $5,500 on his AmEx card with a $5,600 limit. He paid his balance monthly, but only after his statement came out. When he began posting his payment BEFORE his statement was generated, his score was boosted to 701, saving him $3,500 on the cost of his $200,000 loan.
- Noah had a 649 Equifax score, despite a good payment history. His Chase account showed a balance of $2,600 and a limit of $2,500. Paying that account down to $100 before his next statement was generated raised his score to 718, which reduced the costs on his $100,000 refinance by $3,250, a very welcome saving.
You likely already knew that avoiding late payments, not incurring charge-offs or collections, and having a mix of mortgage, installment, and revolving debt are important elements of a high credit score. Don't forget, however, that the date WHEN you pay your revolving balances impacts your scores, too!
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.