Step 4: Manage Your Debt Strategically

How you manage your credit card balances is one of the best-kept secrets for improving your scores. There are specific rules that the scoring system uses to rate revolving balances and they are:

1. If you want your scores to improve, consistently keep your balances on all credit cards under 30% of the available limit on statement date.
2. If you want to maintain your scores, it’s okay to keep the balances on all cards between 30%-49% of the available limit on statement date.
3. Once your balance goes over 50% of your available limit, you start losing points. According to Fair Isaac & Co., a maxed-out credit card can cost up to 80 points, even if there is a good history on that account. Logic: Statistics show that individuals who carry a balance of over 50% on revolving accounts month to month, appear to be living off of their credit cards and are more likely to default on their payments. While this rationale does not make sense on low limit credit cards, all accounts are treated the same.

Statement date means the date your actual statement is printed or emailed to you. It is not the due date. What most consumers don’t realize is that in most instances the balance printed on the statement is the balance that gets reported to the credit bureaus and it is the balance to limit ratio that shows in your score. So make sure that you find out from each of your revolving account creditors what date they print your statement, and make your payment before that date.

With creditors lowering limits on even the most credit-worthy individuals today, managing your credit card balances strategically is more important than ever. Here are some to tips to make sure that you manage your limits wisely:

• If you have to charge more than the 30% or 50% of your available limit as defined above, then make sure that you go home and pay that balance down immediately. Don’t take any chances.
• If you cannot pay down your credit card balances to 30% or 50% of your available limit as defined above, even though credit card companies are tightening up on limits, call your credit card companies to ask for a limit increase without pulling your credit. You’d be surprised at how many creditors will oblige if you have maintained a good payment history on the account.
• Pay credit card balances across the board. In other words, it will not help your credit scores if you pay down one card at a time. So if you have 3 cards at 80% of their limit, and you cannot pay them down to 30% or 50% of your available limit as defined above all at once, pay them down in equal increments so the balances all decrease at the same rate.
• DO NOT consolidate your credit card debt onto one low-interest card UNLESS if after the debt transfer the balance on the new credit card is under 30% or 50% of your available limit as defined above.
• Don’t go over your credit card limits, even if by just one dollar–doing so could cause you to lose 100 or more points, the result of a double penalty. The system interprets that you cannot hold to a creditor’s agreement, and also that you are overextended. Both carry very negative impacts to your scores.
• Be careful with American Express cards because they have no available credit limits. As a result, the scoring system will use last month’s statement total as your available credit limit. This means that if you spent $ 5,000 last month, and then $ 6,500 this month, it appears to the system that you are over your limit. The best way to handle AMEX is to make sure that you pay your bill before the statement date, without exception.

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