You probably know that paying your bills on time is crucial for your credit score. But there are other factors that play into your score, as well.
One factor that you might not know about: how much of your available credit you use. You probably know it’s bad to max out a card, but even modest changes in your spending can have an impact on your score.
That’s because this factor, known as your “credit utilization ratio,” accounts for 30% of your FICO score. The other major credit scoring model, VantageScore, calls it “highly influential.” Put simply, it’s the second-most important part of your score after paying on time.
To calculate your credit utilization, add up the credit limits across all your credit cards. Next, add up the balances on your cards. Divide total balances by total limits and multiply it by 100 to get a percentage. For example, if your balances add up to $5,000 and the credit limits across all your cards add up to $10,000, your credit utilization ratio is 50%.
Ideally, you shouldn’t use more than 30% of your available credit on any card, a guideline supported by FICO and VantageScore. And the lower your usage, the better it is for your score. People with excellent credit scores tend to have a utilization ratio much lower than 30%.
As you prepare your lists and plan your budget for the holiday shopping season, it’s worth paying attention to your credit utilization. Here are tips for protecting your credit score as you shop.
Make multiple payments throughout the month
Credit card issuers typically report balances to the credit bureaus once a month. If your issuer reports your balance after you’ve charged quite a bit and have yet to pay, your utilization will be high. That can ding your credit score, even if you routinely pay off your balance every month.
Consider making multiple small payments throughout your billing cycle, so your utilization is consistently low, rather than building up to one big payment.
Note that this strategy won’t help if you only pay the minimums on your cards, says Elaina Johannessen, a program director at LSS Financial Counseling in Duluth, Minnesota.
“If you are making your minimum payments and paying half of it now and then later, it’s not making a difference. Pay down debt as fast as possible to increase your score,” she says. If possible, pay in full. Carrying a balance on your cards does not help your score — that’s a common myth.
Ask for an increase in your credit limits
A higher credit limit will automatically lower your overall utilization ratio. If your issuer offers you a credit limit increase, take it. You can also request a higher limit, especially if you have been a good customer and paid on time, or your income or score has gone up. Ask the issuer if there will be a type of credit check called a hard inquiry, as that can temporarily knock a few points off your score.
Johannessen warns that having a higher limit may tempt you to spend more, which would defeat the purpose. As long as your spending remains the same, the higher limit should help your utilization, and in turn, your score.
Use cash or rewards points instead of charging
Using cash or your credit card’s rewards points is an easy way to control how much you charge to your cards during the holidays, says Daniel Milks, a certified financial planner and founder of Woodmark Wealth Management in Greenville, South Carolina.
Milks says he plans for the holidays by saving up rewards points from purchases throughout the year. Some credit cards also offer cash back at department stores during the holiday season or for using their online portal to make purchases. You can find these offers by logging into your credit card account online.
In the long term, think about creating a budget for next year’s holidays and saving money ahead of time, says Johannessen, so you don’t need to worry about your credit utilization at all.