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Improve your credit score by keeping card balances low

Most lenders now expect you to stay even further away from the edge

By

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive
Question for the CreditCards.com expert

Dear To Her Credit,
I want to get my credit score as high as possible because we are saving to buy a house. I always pay my bills on time, so when I signed up for one of those online services that tells you your score, I expected to be at the very top. Instead, my score was just above average. The online service tells you what's keeping your score from being higher, and it said I was using too much of my available credit limit. That doesn't seem right to me, because I have plenty of room left on my cards. I think my available credit all added together would be about $15,000, and they say I owe $10,000. It's much less than that after I make my payments.

What do you think? -- Morgan

Answer for the CreditCards.com expert

Dear Morgan,
One would think that keeping $5,000 distance from your credit limit would be plenty, but most lenders now expect you to stay even further away from the edge if you want to have the best possible credit score. Experts now say you should be using no more than about 50 percent of your available credit -- not the 67 percent you are using now. If you've maxed out on an individual card, that could hurt your score, too, even if your overall ratio of credit available to credit used is otherwise good.

The amount you owe accounts for 30 percent of your credit score. If you want to be in the top tier of credit scores, you should try to keep your balance even lower -- the closer to zero the better. Yes, it makes you wonder why even apply for all that credit if you get dinged for actually using it, but that's the rules of the game nowadays.

Keeping your balance low can be hard if you use your card as much as I do. I put business travel expenses on my airlines reward card, and those bills add up! Even though I pay it off every month, I can have a hefty balance right about the time the bank sends its report to the credit reporting company. It doesn't seem fair that they report me as having a hefty balance right before I send in full payment, but that's the way it works.

The obvious solution would be to just use the cards less often. However, many purchases are difficult to make any other way. (Have you tried to rent a car or book a hotel with cash or check lately?) I like the security of using a card, and the credit card records help me track my spending. I don't mind the perks, either -- I'm keeping an eye on how many miles I need to get to Hawaii again!

It's possible to lower the amount you have on your card at any point during the month without changing the amount you spend on it. Here's how: 

  • I spend about the same amount on my main credit card every month, so I scheduled automatic online payments to be made every week from my bank account for about 20 percent of my usual monthly charges. That way, when I get my bill, I only have to pay the difference. More importantly, at no time during the month do I have a high balance. Some issuers have certain rules and restrictions about the number of "micropayments" you can make every month, so check with your credit card company first.

Of course, automatic online payments are only a good idea if you keep a comfortable balance in your checking account.

  • Another way to keep your balance down during the month is to make a payment immediately when you make a significant purchase. For example, when I buy airline tickets on my credit card, I could immediately go to my bank's website and make a payment on my credit card. There's no rule that says I can't pay my bill before it comes.

Lower balances throughout the month, along with your continued good payment track record, should help you soon achieve an outstanding credit score. Keep up the good work!

See related: Help for bad credit, Micropayments: a strategy to cut credit card debt, Understanding how credit scores work

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Published: June 27, 2008


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