Most people know that paying off your credit cards completely will improve your credit score. What many don’t know is that carrying a small balance on your accounts is also very beneficial. Although having a balance isn’t at all necessary for a good credit score, the monthly balance that your creditors report to the three credit bureaus plays a large role. These reported balances are weighed next to your available credit, creating a debt-to-credit limit-ratio, or utiilization ratio, that accounts for a full third of your FICO score.

The first step to understanding how a small balance on your credit cards can help you is to understand what makes up your credit score. 35% of your FICO score is based on your payment history, meaning how long it’s been since a missed payment and how on-time you are. 15% of your FICo score is the length of your credit history,  meaning individuals that have just started using  -credit aren’t likely to rate high in this area. 10% of your score accounts for new credit, meaning any new credit or loan accounts you have opened. Another 10% is made up of the type of credit you’re using. Mortgages, car loans, student loans and credit cards all factor differently. Lastly, a full 30% of your FICO is made up of the amounts you owe on your accounts. These amounts are weighed against the amount of credit you have available to determine how you’re using your credit.

Another thing to realize about how your credit card use is reported is to understand the idea of reported balances. For example, people that charge their card limit completely each month but pay in full aren’t likely to have a good credit utilization on their report because each month their creditor will report as if the card has been maxed out. This is where small balances come in to play. Small balances can often be even better than a balance of zero, according to FICO. Although the difference between having a zero balance and a small balance isn’t great, it can pay off for individuals trying to increase their score quickly. The best way to use this benefit for yourself is to use your credit card to make a small, inexpensive purchase. Pay off the balance immediately–or when you receive your bill in the mail–to ensure you aren’t paying interest or forgetting to pay entirely. This small balance will be reported to the credit bureaus by your creditor and will help your FICO score while avoiding finance charges and interest.

Of course, this strategy won’t work miracles. The difference between a small balance and a balance of zero is very small, although it does exist. It’s also important to realize that the best thing to do for your credit score is to pay your bills on time, avoid accumulating debt, and wait. Still, this method is great for people that are looking for every point that can get to qualify for a low mortgage or loan rate. In general, the best thing to do is to always keep your card balances below 30% of the limit and make on-time payments for a dazzling credit score that will net you the best interest rates available.

One of the best resources for anyone trying to increase their FICO score is MyFICO.com, particularly the Forums. The FICO boards have helpful posts for understanding the FICO scoring method, as well as ways to qualify for credit and rebuild problem credit histories. You can also sign up for a free trial of of the FICO Score & Credit Report monitoring, as well as Score Watch and Suze Orman’s FICO Kit.

(No Ratings Yet)

 Loading ...