I was checking my credit score this month and can see my score came down. It gave the reason "% of balances to credit limits is too high on revolving accounts." What is this? I pay my bills in full and on time, usually before the due date. I haven't had any interest or fines, so why did my score go down? How do I get a good credit score?
The balance on your credit report is usually the balance shown on your billing statement, so even if you pay your balances in full each month and before the due date, your credit report will likely show a balance for the account.
The statement you received indicates the balance on one or more of your credit cards as reported to Experian increased, and as a result your score declined. A higher balance as compared to your credit limit is an indicator of risk and is called your utilization rate.
You don't specify how much the score dropped, so it may have been just a little. Because you pay your balances in full each month, the score likely will rebound over the next billing cycle or two if the balance reported to Experian decreases.
Typically, you will receive four, and sometimes five, risk factor statements. You only mention one of the factors you received, so it might not be the major factor affecting your score. The factors are usually listed in order of importance.
Even if your credit score is already good, this list of factors will help you understand what most influenced the credit score and will give you the knowledge to make your scores even better. Learn more about good credit scores and credit score ranges.
How to get a good credit score
Some things you can do to improve your credit scores include:
- Making all your payments on time
- Keeping your utilization rate as low as possible
- Paying down balances, including balances on installment accounts
- Having a "mix" of credit accounts, such as revolving and installment accounts
- Applying for credit only when you need it
Make All Payments On Time, Every Time
Your payment history, which shows whether or not you make your payments on time, is the most important factor in credit scores, so you are correct in thinking that paying all of your bills on time is essential to maintaining good scores.
For those who have had credit difficulties in the past, the most important thing they can do to improve their credit scores is to bring any past due accounts current and make all payments on time going forward. However, there are other factors that weigh heavily when calculating a credit score, and one of them is your credit utilization rate.
Keep Account Balances Low
Your utilization rate, or balance-to-limit ratio, is the second most important factor in credit scores, and is calculated by dividing the total of the balances on your credit cards by the total of the credit limits on your credit cards.
You indicated that you typically pay your balances in full each month, which is good. Most creditors send account updates to Experian monthly. However, if the balance on one or more of your credit cards is high when the creditor reports the account, that balance will be reflected on your credit report, even if you pay the balance in full later in the billing cycle.
Having a high balance reported on a credit card account increases your utilization rate, which in turn lowers credit scores. Many credit scoring experts advise keeping your utilization rate below 30%, but that number is a maximum. The lower your utilization rate, the better for your scores.
Ideally, you should pay balances in full every month, as you stated, but also strive to keep your balances low throughout the month. Doing so will not only help you avoid paying interest fees, but will help your credit scores as well.
Thanks for asking,
The "Ask Experian" Team