Building credit takes time, and there aren’t many shortcuts. But paying your credit card bill early could give you a boost in just 30 days.
Ted Rood, a senior loan officer in St. Louis, says he has seen credit scores jump as much as 100 points as a result of this approach. Here’s why it works and how to do it.
Timing is everything
Two factors have a big influence on credit scores, and one’s pretty obvious: paying on time. Late payments do credit damage that only time can repair.
Early payments, on the other hand, can help with the second big factor, which is credit utilization. That’s a big term for a simple concept: how high your balance is compared to your credit limit.
Most credit experts recommend keeping balances under 30% of your limit on any card, and lower is better. Consumers with the very best scores typically use less than 10% of their available credit.
Paying early can mean that whenever your card issuer reports your balance to the credit bureaus, it will be a small percentage of your available credit. And unlike late payments, high credit utilization stops hurting your score as soon as a lower balance is reported.
Who it can help
If you are just shy of a credit score that would give you what you want — getting a credit card or loan, say, or the best terms on a mortgage — consider paying early or extra to get balances as low as you can. It’s also worth doing if you just made the cut, because credit scores fluctuate. A margin of safety is a good idea.
Reducing credit utilization is “a great way to see your score go up,” says Jeff Richardson, a spokesman for scoring company VantageScore.
Rood notes that this strategy works best if high credit utilization is the only blemish on an otherwise good credit report.
How to do it
You don’t need to know when your balance is reported to the bureaus — just make sure it stays low throughout the billing cycle. Depending on your budget, try one of these methods:
- Setting up alerts to let you know when you’ve reached a certain percentage of your available credit. When you get an alert, go online to make a payment.
- Setting up charge alerts or checking your account regularly so you can pay off purchases as soon as they post
- Making planned “micropayments” every week or two to keep balances low
Rood says that retail credit cards — those associated with a particular store — can create problems because they tend to have low credit limits. Just $250 worth of purchases on a store card with a $500 limit puts that account at 50% credit utilization. But it’s also easier to fix high usage on store cards than if you’ve used 50% of your $10,000 Visa limit.
Consolidating debt can help
If you’re having trouble getting below 30% credit usage but have decent credit, you could consider a personal loan to pay down credit card debt.
That can drop your utilization percentage — and the loan might give you a lower interest rate, too. And having a more diverse mix of credit (loans as well as cards) can help your score.
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