Master Your Revolving Lines of Credit and Utilization Ratios
Credit cards or revolving lines of credit can be a double edged sword either fortifying or hindering credit scores. Understanding how the utilization ratio affects the scoring algorithm is a key integral in leveraging these accounts in your favor. The credit utilization ratio is a measure of the credit card balance relative to the credit limit.
These account for 34% of your entire credit score. The ratio is summed up simply by dividing what is owed by the total credit limit. The higher the balance, the greater the credit utilization, which results in lowering the credit score.
How Do You Win The Game
So how do you win at the game of revolving credit when it accounts for such a large part of your credit score? The answer is quite simple. This is something we are not taught in school and certainly is not something the credit card companies want to share with us. Why would they? Well they wouldn’t. If they explained how to manage the accounts properly it would cut out a profit center that paid them just shy of $15 billion dollars of revenue in 2020 quoted from our Federal Reserve Board of Governors, issued November 5th, 2021.
This tells us that what we are about to teach you here, while not a secret, is a strategy that if put into practice by the masses could be crippling to our financial system. Not only could it remove the $15 billion dollar annual revenue stream from the credit card companies pockets but the disruption in the stock market with this loss would mean drastic losses for the institutions and their investors. Knowing this helps us understand why the banking institutions educating consumers on credit utilization suggests carrying balances on revolving trade lines is a “good thing.” For them of course, not for us…
What Is This Well Kept Secret?
The revolving trade line credit utilization algorithm is best managed and beaten using this simple practice. Utilizing no more than 20% of the available limit on the account per statement period. Then, pay the statement balance off in full immediately upon receipt. Repeat this process over a series of 3 to 5 months and the banking institution system automation will raise the available limit on the account without request.
This method allows the use of the system for free to the end user, you. It will result in a 40 to 60 point increase in the credit scores on all reporting bureaus. And finally, this establishes leverage for the consumer to invest with on acceptable ventures through lending options opened up by the reduction of risk in their credit profile.
So what did you just learn?
If you have a $2,000 dollar limit on a credit card the rule is to spend no more than $400 dollars in a 30 day statement period. When the billing statement arrives in the mail or email, pay the balance in full or to a zero balance. Repeat the process 3 to 5 times and you will receive an automatic credit limit increase on your card as well as a 40 to 60 point increase in your credit scores.
This is a lesson that needs to be taught to our children, parents and grandparents then passed through for generations to come. It is a giant step for all of us to start winning at the game of credit.
-Stay tuned to our blog for educational resources to assist in building your credit profile.