We are always looking for ways to raise your credit score. Thanks to a smart LearnVester’s comment (thanks Lavanya!), Credit Karma thought it would be helpful for you credit-savvy consumers out there to know how credit use affects your credit score.
Is it okay to rack up credit debt if you pay it off by the end of the month? How often should you use your credit card to improve your credit score? Should you stop using credit cards altogether? Let’s dive in.
The Magic Number.
A significant component of your credit score is your credit utilization rate—the ratio of your total credit card balances to your total credit limits. Lenders pay attention to your credit utilization rate because it’s a reflection on whether you are responsible or risky in handling credit.
For example, a credit utilization rate of 85% may reflect that you are credit desperate or financially unstable (after all, you are spending tons of money that you don’t have); a credit utilization rate of 0% may also have a negative impact since you need active credit management in order to build credit. The magic number for credit utilization rate happens to be under 30% for a good credit score (find out why here).
Credit Score Savvy Rules To Using Your Credit Card.
The #1 cardinal sin is thinking that not using credit cards at all will help your credit score. Credit cards are one of the best tools to build your credit, as they consistently demonstrate every month how responsible you are with credit. The key here is to use your credit cards the right way to benefit your score.
1. Consistently Manage Your Credit Utilization Rate.
Stay under 30% of your total available credit at all times during the month. Don’t rack up your credit use to 75% and promise to pay it off at the end of the month. Your credit score utilization rate is calculated as a snapshot at the time of scoring, so it may catch you at your peak credit use. Plus, letting yourself max out your credit card, even if you can pay it back, is a good way to practice a bad habit.
2. The Lower Your Credit Utilization Rate, The Better Your Score.
Lower credit utilization suggests to lenders that you manage credit responsibly by not being over your head in debt, even when you have available credit on hand. Remember that your credit utilization rate is relative to your total credit. If you have a $300 balance on each of your $500 limit credit cards, you are utilizing a big 60% of your credit—no good. If you are utilizing $2,000 each on two $10,000 cards, you are utilizing 20%—great. Know your credit limits and how much you are using.
3. Don’t Keep A Balance On Your Card!
A big, big misconception around credit cards is that you must carry debt from month to month in order to have good credit. No! We advocate using credit cards to build credit, but we definitely don’t encourage you to stay in debt. When your credit card statement comes in, the absolute best thing to do is to pay it off in full (having high credit utilization typically comes from people keeping debt on their card and piling more purchases month to month). Once you pay your credit card off, your credit utilization rate is now 0%, so continue to put small purchases on your card. Continue purchasing only what you can pay off at the end of the month and up to 30% of your total available credit.
The golden rule with credit cards? Only purchase what you can afford to pay back in full at the end of this month, not by next month or by next year. Do that, and your credit score and your credit card can coexist in financial peace—and that’s just good credit karma.