One way to raise credit scores is by using less of your available credit. The credit scoring system rewards consumers who do not utilize their entire available credit limit. You can raise your credit score because a higher credit limit will reduce your debt utilization ratio.
The amount of debt owed compared to your available credit limits accounts for 30% of your total credit score. This is the debt utilization ratio.
To calculate your debt utilization take the total amount you owe and divide it by the total amount of credit you can borrow.
Any outstanding debt is included in the debt utilization ratio which means all credit card debt, personal, auto and mortgage loans and even home equity lines of credit.
The lower the debt utilization ratio the better your credit score. Let’s say you have $10,000 in available credit but only owe $3,000 on the credit card, your debt utilization ratio is only 30%. But if you owed $9,000 on the credit card that would mean you are using 90% of your available credit.
The credit scoring formula will view you as a high risk. They will interpret high credit utilization as a sign of financial trouble and possible default on other credit obligations.
Consumers who keep their account balances to at least 30% or lower of the available credit limit are viewed as good credit risks. Credit accounts that are not maxed out translate into good credit management. The credit scoring formula rewards consumers who manage credit well.
Watch out for balance transfers. They can raise your utilization ratio and lower your credit score. Should you transfer an account balance because a new credit card offers a lower rate; that new credit card could come with a lower credit limit which would increase your credit utilization.
As mentioned above, a high credit utilization ratio will lower your credit score. But should this occur you have an opportunity to regain credit score points by paying down the balance on the new card quickly. It does not have to be paid in full to see an increase, you will raise your credit score if you can get it to 30% of the credit limit.
Paying down your credit account balances will decrease the credit utilization ratio and thereby raise your credit score. However, it is not always financially feasible to pay down credit accounts. In this case, requesting a credit line increase can accomplish the same.
A credit limit increase can raise your credit score if handled correctly. The strategy is to request an increase in credit limit but do not use the new available credit. Get all three of your credit scores free today.