One mistake can lower your credit score by 50 points: how to avoid it
'23.07.2021'
Nurgul Sultanova-Chetin
There are a number of methods you need to follow as you work to improve your credit score, from paying off your balance on time to knowing how often you apply for new cards. But one of them can immediately affect your credit rating, claims CNBC.
Credit usage is a percentage of your credit line. For example, if you have a $ 10 loan available and you made $ 000 purchases with your credit card this month, that means your loan utilization rate is 5%.
This is an important factor in determining your ranking, up to 30% of the indicator.
Experts traditionally recommend not using more than 30% of the available loan in a given month, but ideally keeping it closer to 10% or lower. This is because lenders consider borrowers who pay large amounts on their credit card to be unable to pay off the debt.
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“If your account has a high level of utilization, it indicates a high level of risk,” said Rod Griffin, senior director of consumer education at Experian. "The reason is simply that the larger the loan, the higher the risk that you will not be able to pay the debt."
Which lowers the rating by as much as 50 points
Even if you intend to pay the bill in full, Griffin says high utilization can lower your score by as much as 50 points in the short term.
Griffin experienced this firsthand. In 2019, he used one credit card to spend on family vacations, paying for fuel, hotel, food and gifts. From November to December, his rating dropped 40 points due to more than usual credit. And when he paid off his debt the next month, his credit score went up again.
If you are close to the threshold of different credit rating ranges, remember that 750 to 799 is generally considered “very good”, while 670 to 739 is “good” and 580 to 669 is “fair”. So it is worth asking about your level of use of the loan, especially if you plan to apply for a new loan in the near future.
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By paying a percentage of your bill before the monthly statement is generated, you can avoid high utilization rates.
If you normally use 20% of the available $ 5000 loan, but made a $ 1000 purchase (for example, you bought a new TV or computer), then this raises the loan utilization rate to 40%. But paying before the date of the report can save your rating from hitting.
However, if you have a credit rating of around 800 or higher, don't worry about the temporary 40 or 50 points.
“If your rating is 750 or higher, then you can get the best lending rates and conditions,” said Griffin.