It's that time of year again. People are evaluating their lives and resolving to be healthier, wealthier, happier, more giving, and any number of other resolutions. January first always brings these resolutions to the front burner. The important factor to consider is....what resolutions do we actually keep? Intention really means nothing! Actions mean all!
For credit and credit scoring, what would be the best resolution for most people to make for 2011? If I were given the authority to choose a credit resolutions for all of America, this would be my choice:
Keep your credit card balances below 30% of the available credit at all times.
This one step could make the most dramatic increase in most American consumer credit scores. 30% of the credit score (which is 255 credit scoring points) are determined by the balance ratio of revolving credit.
The often overlooked segment of this resolution is "at all times". Many consumers pay off their credit card balances in full each month. I recommend that practice as well. Unfortunately, too many consumers use one card primarily because of rewards points that are granted by the credit card company. This practice often causes the balance during the month to exceed the 30% ratio guideline and will only drop under or to zero once the monthly payment has been made.
The problem lies in the fact that the scoring system only looks at your balance the precise moment the credit report is pulled. The scoring system does not calculate or know that you pay off the account each month. It sees the balance and determines the score at that moment. If the payment has not yet been applied to the account, the ratio could be over 30%. Lowering the credit score.
For those who run higher balances on your credit cards, consider these resolutions.
If you normally run a balance near the available credit. Resolve to keep the balance under 80%. If you do, your credit score will be much better in 2011 than 2010.
If you normally have a balance of more than 50% of available credit but less than 80%, then resolve to keep your balances at all times in 2011 under 50%. Again you will experience a much higher credit score if you do.
This one resolution: "keep your credit card balances under 30% of the available credit" will bring lower interest rates, lower insurance premiums into your budget for 2011 because it will INCREASE YOUR CREDIT SCORE!