Should you charge and then pay off your credit card? My utilization rate is 15%. However, when I stopped using the card, my score dropped 30 points. Why?
Keeping your credit card open and active is one key to keeping your credit scores in top shape. Lenders view credit card usage as a strong predictor of risk, so how well you manage your credit card account will usually have a big impact on your credit scores. Credit scoring models also need to see activity in the account to include it in your score calculation. If you haven't used the card for a number of months, it might show too little activity be included, which can result in a credit score drop.
Make Payments on Time and Keep Balances Low
The two most important factors in your credit scores are your payment history and your credit utilization ratio, or amount of available credit you're using. Therefore, it's crucial that you make all your payments on time and keep your credit card balances as low as possible.
As a rule, you should keep your utilization ratio under 30%, so your ratio of 15% is not bad. However, keep in mind that 30% utilization is a maximum and not a goal. Generally speaking, the lower your utilization rate, the better. Studies show that the people who have the best credit scores have utilization rates below 10%.
It's a myth that you should carry a small balance on your credit card in order to have good scores. As long as you are using your credit card periodically and making payments on time, your account history will show that positive activity.
Pay Your Credit Card Balance in Full Each Month
Ideally, you should pay a credit card's balance in full each month. Doing so is good for credit scores because it means you won't accumulate revolving debt and cause your utilization ratio to climb. It's also good for your wallet because you won't be wasting money on interest charges.
Pay Attention to Your Credit Score Factors
When you order your credit score from Experian, you should receive a list of the risk factors that are most affecting your credit score at that time. If you notice a change in your score, take a look at those factors to make sure you understand what in your credit history is most impacting you at that moment and whether there are other variables you hadn't considered. For instance, opening a new account or paying off a loan could also cause a change in your scores.
Increase Your Credit Score With Experian Boost™†
Experian now offers a free service that allows you to boost your FICO® Score* by adding your monthly utility, cellphone and other telecom payments to your credit history. By linking the bank account that you use to make these payments, Experian can add payment history going back as far as 24 months to your report. Once added, you will receive a free updated score so you can see how much your credit score has improved.
This question came from a recent Periscope session we hosted.
Thanks for asking,
Jennifer White, Consumer Education Specialist