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June 09, 2011

  • News:  Utilization's Impact On Credit Score 

    Consumers often believe that if a lender issues a credit card with a high credit limit that the amount they utilize doesn't matter as long as they are paying their monthly bill on time. However, nothing could be further from the truth. The amount of credit that you utilize has a large impact on an individual's credit score often referred to as the FICO score. Your FICO score is calculated using a variety of variables one of which is your credit utilization. Utilization is one variable which refers to your debt-to-credit ratio. As your credit card balance increases, your FICO score decreases. To prevent any negative effects from the use of credit, most experts advise credit cardholders to maintain their credit utilization to less than 30 percent of their overall credit limit.

    How you pay your monthly credit card bill is also taken into consideration when your FICO score is calculated. It makes sense to know that paying on-time each month will play a big role in calculating your score, but you may not realize how paying over the minimum payment will affect your score. If you are consistently paying more than the minimum each month, it will have a positive effect and can push your score up even more than if you were just paying on-time. Vendors like to see you spend money because each time you swipe your card, it generates income for banks and credit card companies.

    While it's important to maintain credit utilization below 30 percent of your credit limit, it can also hurt your FICO score if you have several credit cards with zero balances. Crazy as it may seem, lenders like to see some activity on your account. After all, companies can make money off of no activity. If you do have several cards with a zero balance, some experts will say it is best to charge something small every few months and pay the balance off in full when the bill arrives. If you're looking for ways to increase your FICO score, try calling your lender and asking for a credit limit increase or begin paying down your card balance by applying more than the minimum balance each month. Taking these two steps along with making payments on time, is the fastest way to a higher credit score.

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