Why You Should Strive to Use a 1% Loan
Raising your credit score often seems like a game, and you may not know the rules until you break one of them. One important rule – the rule that affects 30% of your credit score – is the percentage of the loan you are using or the use of the loan. While experts say credit utilization should be below 10%, a new NerdWallet report explains why you might want to cut that zero. The concept of using credit is simple: when your bank offers you a credit limit, your credit card balance may indicate the likelihood that you will pay it back. If you only use $ 50 of your $ 1,000 credit limit, you’re at less risk than someone with a $ 800 balance. Credit usage changes every month as your banks report your balances to the credit bureaus – Experian, Equifax, and TransUnion.
To learn more about credit ratings, watch the video below:
There are several ways to achieve a true 0% loan utilization each month. You can pay off each credit card transaction as it is posted, or pay off the balance before the statement closure date. The third option is to pay off the balance by the due date and stop using the card in the next payment cycle.
But experts say it’s best to aim for a utilization rate of just above zero – 1%. As CNBC reports , some scoring models don’t like using 0% because it looks like you’re not using your credit cards at all. While 0% credit utilization still looks better than numbers above 30%, scoring models tend to use single digits.
According to NerdWallet, there are several ways to achieve the desired 1% utilization. You can get 0% for every credit card except the max limit card and only use 1% of that card. You can also pay for transactions as they are posted to keep your balances low. If you don’t like manually calculating usage, check your credit card website for usage updates.
If you find it difficult to reach 0% or 1%, try to use a loan below 10%. This will still go a long way, especially if you also have a history of timely payments that affect 35% of your credit score.