I was checking my credit score this month and can see my score came down. It gave the reason "percent 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?
Your credit card balances play a big role in your credit scores. Although on-time payments are the most important factor in your scores, lenders also look at your credit utilization rate. A higher balance compared with your credit limit will cause your utilization rate to increase, which lenders and credit scoring models view as an indicator of risk.
To calculate your utilization rate, add up the total of all the credit card balances appearing on your credit report and divide that number by the total of all your credit limits. For example, if your only credit card has a $2,500 balance and a $5,000 limit, your credit utilization is 50%.
Why Did My Utilization Increase When I Paid My Bills in Full?
The balance your lenders report every month 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 reason you received for your score going down—"percent of balances to credit limits is too high on revolving accounts"—indicates an increased balance on one or more of your credit cards as reported to Experian, which caused your utilization rate to increase. 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 mentioned one of the factors you received, and it might not be the major factor affecting your score. 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 it 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
Here are some things anyone can do to improve their credit scores:
- Make all your payments on time, every time. Your payment history, which shows whether you make your payments on time, is the most important factor in your FICO® Score☉ , so you are correct in thinking that paying all 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.
- Keep your utilization rate as low as possible. Your utilization rate is also called your balance-to-limit ratio, and it is another important factor in your credit scores. 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. Ideally, you should continue to pay balances in full every month, but also strive to keep your balances low throughout the month by either limiting spending or making more frequent credit card payments. Doing so will not only help you avoid paying interest fees, but will help your credit scores as well.
- Apply for credit only when you need it. Although inquiries tend to have a minimal impact on credit scores, too many applications for credit within a short period of time can be viewed by lenders as a sign of financial distress. Limit the effect inquiries have on your credit by avoiding unnecessary credit card applications. If you're shopping for a loan, submitting all applications within a two-week period will cause them to be counted as one application as far as your scores are concerned.
- Have a "mix" of credit accounts, such credit cards and installment accounts. Installment accounts may include car loans, student loans, personal loans, or a mortgage. Your mix will grow over time, so be patient and don't open a new credit account simply to aid this category.
- Sign up for Experian Boost™† . With Experian Boost, you can now get credit for on-time utility, telecom, and streaming service payments. Signing up is free, easy and secure.
Thanks for asking.
Jennifer White, Consumer Education Specialist