In today’s difficult financial times, everyone knows that every penny counts. What’s more, those in search of financing for big ticket purchases are discovering that every point counts, too… Points on your credit score, that is.
Most people recognize that the ratio of credit balances to credit limits, or CREDIT UTILIZATION RATIO, is a key factor in determining their credit scores. For example, let’s say you have a credit line of $10,000. If you have a balance of $8,000 on that card, that means you’re at an 80% credit utilization ratio. Given the same credit line, and a $1,000 balance, your credit utilization ratio would be just 10%. Obviously, the 10% is better, since it doesn’t make you look as “maxed-out” on that card.1 Pretty simple stuff, huh? Definitely. But here’s what you might not know…
Credit card companies generally update your balance once per month. That’s no big deal either… But- did you know that they typically set up that reporting date so as to report your balance slightly BEFORE your payment is due..? Why? So that your balance is almost INVARIABLY going to be reported when it’s the HIGHEST, simply because you haven’t paid it yet!!!
Now, I don’t want to sound like a conspiracy theorist or anything, but think about this… If your credit utilization ratio goes UP, what happens to your credit score..? It goes down. If your score goes down, what do the credit card companies do? They raise your interest rates! If your interest rates go up, the balance you carry could follow the same trend. What does that mean..? Uh-huh… More money to the credit card companies.
And what else do the credit card companies do once your balance goes up..? They lower your limit. What’s more, they can arbitrarily lower your credit line, to limit their outstanding potential liabilities”. Well, going back to the original credit utilization ratio calculations, the $1,000 balance just made your credit utilization ratio jump from 10% to 20%, without you having made a single purchase. This makes your score go down, and thus, the cycle continues… Seems like a pretty nifty cycle to be in control of, huh..? Being able to so readily manipulate the very score that dictates how much you’re charging… How do I get in on something like that…?
Now, it’s important to note that, the bureaus primary function is consumer data management. In actuality they couldn’t care less what your credit score is. They simply want to be the one that controls that information, because they know that other companies would want it, and are willing to pay – on a very large scale – to have access to it. Take, for example, the countless solicitations that fill your mailbox each month, from other credit card companies, offering you miles, rewards, 0% interest on transferred balances, and so on. How do they even know to contact you..? Because the bureaus have told them that your name and address, and that you meet the specific demographic and credit score criteria they’ve asked for. In other words, they may contact the bureaus to obtain a mailing list of people in ‘12345’ zip code, with at least 6 months of revolving tradeline (credit card) history, and a minimum 650 credit score. If your credit score has lowered from 650 to 649 because of the schedule on which you’re billed, or because the other credit card companies have lowered your limits/raised your rates/lowered your scores, there’s one less balance transfer offer in the mail that month. That helps the cards you currently have in your wallet keep your business, and retain their market share.
Oh… And make more money.
So here’s a quick tip to consistently keep your balance reported at a lower amount, and thus, maintain a higher credit score, all month long:
Start by looking at your most recent statement and finding the date that the payment is typically due each month. Assuming you can make it work in your monthly budget, start making your payments (online, if necessary) at least two weeks BEFORE that date each month. That way, the balance your credit card company reports each month is at its LOWEST (or at least, close to it) each month! It might not be a bad idea to call your credit card company to ask when they report your balance. Some will tell you, some won’t. If they do, figure out how quickly you need to pay it, to best plan your payments.
And remember, just like NOT knowing how this works can hurt your score exponentially, KNOWING how it works can raise your scores in the same way! So use this trick, and make your credit your BEST FRIEND, instead of
your WORST ENEMY!