Q: What’s the fastest way to boost my credit score?

For most people, the fastest way to improve your credit score is to pay down your credit card balances.

About one-third of your FICO score (the score most lenders use) is based on your credit-utilization ratio, which is the total of your credit card balances divided by the total of your credit card limits. It’s how much you’ve charged that counts, regardless of whether you pay your balance in full each month. A good target is to use 20 percent or less of your available credit; a lower percentage is better.

“One of the common complaints we hear from consumers is they feel their scores are inappropriately low — in the 600s [on a scale of 300 to 850] — even though they have never been reported late on any credit account,” says Craig Watts, of FICO. “Such people almost always have high balances — and commensurately high utilization rates — on several credit cards, and that lowers their scores.”

An example at FICO’s Score Simulator shows how a hypothetical customer with a FICO score of 707 could raise the score to as high as 777 by reducing the balances on all revolving accounts by 90 to 100 percent over 24 months. This example takes into account the benefits of keeping accounts open longer, but paying down balances faster could improve your score almost as much. “How fast a lower balance can be reflected in one’s score really depends on the lender,” Watts says. Many lenders send data updates to the credit bureaus once a month. “Depending on where your account payment falls in your lender’s data-reporting cycle, your new balance could show up on your credit report within several days — or it can take several weeks to appear.”

You can also improve your utilization ratio by increasing your available credit: “If you have never missed a payment and are a good customer, consider asking your creditors to increase your credit limit on the cards you use,” says Maxine Sweet of the credit bureau Experian.

Closing unused accounts, on the other hand, could hurt your utilization ratio because you will be lowering your available credit. If your card company starts to charge an annual fee, which many are doing now, then it may still be worthwhile to close the account and take a temporary hit. Just don’t open or close accounts or make dramatic changes in the way you use credit within three to six months of applying for a mortgage, auto or other loan whose terms are based on your risk, Sweet says.

Correcting any mistakes in your credit report can also improve your score quickly, especially if you report the errors to the credit bureau online. You can get your credit report free from each of the three credit bureaus once every 12 months at AnnualCreditReport.com.

And don’t forget the best way to maintain a good credit score: Pay your bills on time.

Source: Washington Post

This seems like a logical thing to do, right? I mean, lower interest rates on your credit accounts equals more money in your pocket, true? Yes, transferring your credit card balance from a high interest credit account to a lower one is an excellent way to save money on interest, especially if you carry a lot of debt on your credit card(s).

But how does this affect your credit rating and credit score? The answer to that question really depends on your situation, and how you go about it.

A closer look

Lets say you have $5,000 in debt on a credit card account from “ABC Credit Services”, which has a total credit line of $10,000. For this example, lets just say this is currently your only open credit card account. Since your debt takes up half of your total credit line, this would put your percentage of debt compared to your credit line, for this account, at 50%. We’ll call this your “debt percentage”.

You’re making payments to ABC with no problems and you seem happy with the account and the interest rate. That is, until one day you check your mail, and there it is, a credit card offer from “XYZ Credit Services” with a fixed interest rate set at half of what you’re paying now with ABC! Suddenly dollar signs start popping up in your head, and you start trying to figure out how much money you could save by transferring your $5,000 balance to XYZ. You then decide you’re going to apply for the account at XYZ. Your credit is good right? No problem! You receive the card in a week or so, and go ahead with the balance transfer.
So how does this affect my credit score?

How this balance transfer affects your credit rating and credit score really depends on what you do from this point on, and also what your credit line is on your new card from “XYZ”. If your credit line on your new card is lower than that of the original “ABC” credit account, then your “debt percentage” will be higher, which generally will lower your credit score. This would be true if you closed the original account at ABC, and kept your new account as your only open credit card account.

If you’ve had your “ABC” credit card for a while (maybe 2 years or more), and you have a good payment history with them, then it will most likely be in your best interest to keep that account open, even if you don’t use it. Especially if your credit line with your new lower interest card is below $10,000. Usually for the sake of your credit score, you don’t want to increase your “debt percentage”, you want to decrease it.

For example, if you keep both accounts open, you will have a total credit line of $20,000. With your $5,000 in debt on your new card, and your original account at ABC having no balance, your debt percentage would only be 25%, which is a good percentage and your credit score will reflect that.

Now reverse that and say that you closed your credit account from “ABC”, given that your credit line at “XYZ” stays the same, you would have a debt percentage of 50%, which is what you started out with in the beginning. Add to that a newly acquired credit card with little or no payment history on it, and you’re credit score would almost surely decrease, at least until you establish a longer payment history on your new account.

So for this example, it would probably be best to keep both accounts open. Your lower debt percentage could possibly offset the hit your score took from obtaining your new credit card. And looking to the future, it should look better on your credit report this way too.

Avoid increasing your debt percentage

When trying to keep your credit score as high as possible, try to avoid doing anything to increase your debt percentage. Even though the amount of debt you are carrying on your “revolving credit” is the same, it will always look better if you’re using 25% of your total credit, compared to using up 50% of it.
But don’t try too hard to decrease it either

Be sure not to take it too far by applying for more credit than you need, just because you think it will help your credit score by having an even lower debt percentage. Obtaining any new credit will generally bring down your credit score slightly, at least for a short period of time. Applying for credit too much and too often will almost always have a negative impact on your credit score, which is exactly what you don’t want. Your time would be better spent on trying to pay down this debt instead.
As with anything, being informed is the key

Balance transfers such as this can and will save you money on interest, if you do it right. Stay informed about how things like this affect your credit, and you should be just fine!