This One Move Could Stop Your Credit Score From Dropping


Getty Images

Having good credit isn’t just a matter of pride (though there’s certainly nothing wrong with congratulating yourself for maintaining a good credit score). The higher your credit score, the easier it becomes to qualify for a loan or credit card. And if you take out a big loan, like a mortgage, strong credit could save you hundreds of dollars each year (or more) on interest.

But some people start out with high credit only to see their scores take a hit over time. If this is a situation you’d rather avoid, here’s an important move worth making.

Keep an eye on your credit card balances

Different factors are taken into account to calculate your credit score. The factor that carries the most weight is your payment history, that is, how well you pay your bills on time. But the second most important factor is your credit utilization rate, which measures how much available credit you’re using at one time.

If you manage to keep your credit utilization rate below 30%, you will generally be able to prevent a drop in credit score (at least a drop based on credit card usage). But once that ratio exceeds 30%, your credit score could take a serious hit, so it’s important to keep that threshold in mind.

So, let’s say you have a spending limit of $10,000 on three different credit cards. If you maintain your total balance at $3,000, you should be in good shape when it comes to your credit score. But a balance of $3,500 could hurt your score more, so that’s a scenario you’d want to avoid.

Now, if you already have a lot of credit card debt, to the point where your credit utilization rate is well over 30%, then the sooner you pay it off, the sooner you can help your credit score improve. to improve. But paying off existing debt isn’t the only thing you can do to lower your credit utilization rate. You can also increase your spending limit.

Going back to our example, suppose you could increase your spending limit on your various credit cards from $10,000 to $12,000. Suddenly, an outstanding balance of $3,500 puts you below 30% utilization.

You may think it would be difficult to increase your spending limit. But the reality is that if you’re up to date on your minimum payments, your credit card company might be more than happy to extend your line of credit – especially if it encourages you to build up a higher balance on which they can then collect interest. .

Of course, this leads to an important caveat – if you get a spending limit increase in an effort to lower your credit utilization rate, don’t charge more spending until your existing balance is reduced. Otherwise, you will make it difficult for yourself to bring this ratio back into favorable territory.

Pay attention to your expenses

As a general rule, it’s best not to have a balance on your credit cards, but rather to pay your bills in full each month. It’s an easy way to avoid losing money in interest.

But if you’re serious about preserving your credit score, check your credit card balances weekly to make sure they’re not too high. Checking in frequently could tempt you to temporarily cut back on your spending and avoid an impact on your credit score that would end up hurting you.

Check out The Ascent’s best credit cards for 2022

We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


About Author

Comments are closed.