30 Days to a Better Credit Score
Want a quick way to increase your credit score, without paying more to your debt?
Here’s a way to improve your credit with a phone call.
How does this magic happen? By tweaking your debt to credit ratio. First, let me explain what a debt to credit ratio is, and why it’s so important.
Your debt to credit ratio is essentially the percentage of how much of your credit you are using. It is calculated by dividing how much credit you are using, on all your credit cards, by how much you have available, on all your credit cards. It’s super important because it counts for 30% of your score.
For example: Let’s say I have two credit cards. Credit card one has a credit limit of $10,000, and a balance of $4,000. Credit card two has a credit limit of $3,000, and a balance of $2,400.
To figure out the debt to credit ratio all you have to do is add up what you owe on all your credit cards — in this case $6,400 — and add up all the credit you have available — in this case $13,000 — and divide the two.
$6,400/ $13,000 = 49%
To get a better score, without taking any money out of your pocket, all you have to do is call all your credit cards and ask them to raise your credit limit. This changes how much credit you have available, which will directly impact your ratio.
Continuing with the example above, imagine you called credit card one and they increase your limit from $10,000 to $15,000. You did the same with card two and they increased your limit from $4,000 to $7,000. Your debt is still the same, $6,400, making your new ratio 29%. Because it’s now under the 30% usage, your score will jump the next time the agencies recalculate your score. They do this every 30 days.
$6,400/ $22,000 = 29%
To put this in perspective, let’s imagine you were trying to qualify for a mortgage, and you wanted to get the best interest rate possible. On a $300,000, 30-year fixed mortgage, the difference in qualifying for an interest rate that is 3.5% or 4.0% is $30,640 over the life of the loan. That’s like making a $30,000 phone call.
Word to the wise. When doing this you must be disciplined. It can be tempting to spend more. Resist the urge. If you don’t it will undo anything you gained, and it could easily make this situation worse. However, if you just need a little push it is a prime example of working smarter, not harder, which is the mantra of the financially free.