No matter your financial situation, you can always improve your credit score.
I received this question from a Money Girl podcast listener named Keegan G.:
“I have 2 credit cards with a total of $2,000 in available credit. I heard your advice about how to improve your credit score by managing your credit utilization ratio, and have kept my balances below 30% for the past few months. Should I also open a secured credit card in order to raise my credit score?”
What is the Credit Utilization Ratio?
One of the key factors that cause credit scores to move up or down is how much debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your total available credit limits. This simple formula is the credit utilization ratio.
Here’s how it works: If you have a $1,000 balance on a credit card with a $4,000 credit limit, you have a 25% credit utilization ratio as follows:
$1,000 balance / $4,000 credit limit = 0.25 = 25% credit utilization ratio
The lower your credit utilization ratio the better.
Why? A low ratio says that you’re using credit responsibly and not maxing out your accounts. A high ratio says you’re using too much credit and may even be in danger of missing a payment soon.
As Keegan mentioned, keeping your credit utilization ratio below 20% to 30% is a good rule of thumb to maintain optimal credit.
Should I Have One or Multiple Credit Cards?
There’s a common misconception that it’s okay to max out a credit card as long as you pay it off each month. While paying off your card in full by each statement due date is a smart way to avoid interest charges, it doesn’t guarantee a low utilization ratio.
Instead of maxing out one credit card, it’s better to spread out your charges on multiple cards. If you have 2 credit cards that each have a $500 balance and a $4,000 credit limit, here’s the calculation:
$1,000 balance / $8,000 credit limit = 0.13 = 13% credit utilization ratio
Notice that this is half the ratio of the previous example I gave for one card.
The date your credit card account balance is reported to the nationwide credit agencies typically isn’t the same as your statement due date. If your outstanding balance happens to be high on the date it’s reported, you’ll have a high utilization ratio that will drag down your credit scores.
So remember that having low balances on multiple credit cards is always better for your credit scores than consistently maxing out one card.
How to Build Credit Using a Secured Credit Card
A secured credit card is a fantastic tool for anyone over the age of 18 to build credit. It gives you many of the same benefits as a regular credit card, but you’re required to make a refundable, upfront deposit to open the account.
You choose the deposit amount, which could range from $200 to $3,000 and it becomes your available credit limit. Secured credit cards are typically used by individuals who can’t qualify for a regular card, but need to build credit.
If Keegan needs more available credit in order to keep her utilization ratio below 30%, she has the following options:
- request credit limit increases on her existing 2 credit cards
- apply for an additional regular credit card
- apply for a secured credit card
The Best Secured Credit Cards
The best secured cards report payment information to the nationwide credit agencies, which is how they allow you to build credit. As you make timely payments, you add positive history to your credit files each month.
Here are 3 secured cards that report transactions to the credit agencies, don’t check your credit for approval, and have low fees:
How to Raise Your Credit Scores
To raise your credit scores, you must have credit accounts and use them responsibly by making payments on time and never maxing out credit cards and lines of credit.
Also, watch for errors on your credit reports that could be hurting your scores. The law entitles you get each of your 3 credit reports for free once a year and to get any inaccuracies corrected in a timely manner at annualcreditreport.com.
Click here to download the free Credit Score Survival Kit and watch a tutorial on how to check your credit report and correct errors–plus, how to get your credit SCORE for free.