We've talked about how to increase your credit score in the short-term, and one of those methods is by keeping credit card utilization low.
What is credit card utilization?
Credit utilization is the ratio of your credit card limits to your balances. It's a percentage that reflects how much credit limit you use.
For example, if your credit limit is $1,000 and your balance is $100, then your credit utilization for that card is 10%.
Major credit issuers that report utilization using the statement date:
- American Express
- Bank of America
- Capital One
- Wells Fargo
Depending on the credit issuer, most banks report credit utilization to the credit bureaus when the card statement closes. The only exception is U.S. Bank, who reports utilization on the first of each month.
If you want to keep it simple, you can call or secure message each credit issuer you have to adjust your statement date.
For example, if you want all of your credit card statements to close on the last day of the month, you can request it by calling the number on the back of your card.
Credit card utilization
Credit card utilization is one of the biggest factors impacting your credit score that you can control. By keeping utilization low, you can increase your score quickly.
How to keep card utilization low:
- Know when your card statement closing date is
- Pre-pay 99% of the balance before the statement closing date
- Wait for the statement to close, so it reports a 1% utilization
- Pay off the remaining balance
For most people, staying below 10% utilization is ideal.
0% vs. 1% Credit card utilization
I've seen arguments for keeping card utilization at 0% and 1%, and it depends on your situation.
If you have a thick credit profile with several years of credit history and more than five cards, then it's fine to keep utilization at 0%.
On the other hand, if you're new to credit or you have a thin credit profile, then stick to 1%. Some credit issuers won't report payment history if your statement balance is $0.
If you're someone who has missed a card payment in the past, then I recommend sticking with 1% so that credit issuers will report on-time payments.
Payment history is calculated by on-time payments divided by total payments.
If you're new to credit and you miss a payment, then this will negatively impact your credit score.
- 1 on-time payment / 2 total payments = 50%
- 999 on-time payments / 1,000 total payments = 99.9%
Be sure to stick to the 1% credit utilization strategy if you've missed a payment in the past.
To avoid missing payments in the future, you can always setup auto-pay (if it makes sense for you).