Episode Transcript
[00:00:00] Speaker A: It's Tuesday. That means Mansa Musa is on the phone with me and Manta. For the last couple of weeks we've been dealing with strategies to improve our cash flow using our credit cards and upping our credit scores and things like that. But today we're going to take a dive into why that matters.
[00:00:19] Speaker B: Yeah. We're going to talk about a component of your credit score and it's called your credit utilization ratio.
The initials for that are cure. If you do this right, you'll fix your sick credit. So. Okay, sorry for the bad humor.
So credit utilization ratio, what it means is, is how much of your available credit are you using?
So if you have a credit limit of $5,000 and you have $1,000 balance on that, then you're using 20% of your credit.
[00:00:59] Speaker A: Yes.
[00:01:00] Speaker B: Now, what the credit bureaus look at, they look at your limit and what your balance is on your statement closing date. Now we encourage people to go back to take control Tuesday.com, check the archives and listen to the series we did on on statement closing dates because those are important.
The reason that this is important is your credit utilization ratio is 30% of your credit score. It's the second highest factor behind paying your bills on time.
So even though you pay your bills on time, if your credit utilization score isn't where it should be, your credit score will be low.
So now anything that's 20% or below of your credit score utilization score is where you want to be. Now, lenders look at high credit utilization as though you're in trouble.
If your credit cards are getting maxed out, then you're a higher risk in their eyes.
If your credit utilization is extremely low, they think you're under control and you can make a payment.
[00:02:17] Speaker A: Right.
[00:02:18] Speaker B: This is why it impacts your score the way it does. But here's how you use your credit utilization ratio to manage your score. Number one, know your credit card statement closing dates.
Number two, make an early payment if you can so that what's reported to the credit bureau is lower.
Number three, spread out your spending. This is why people have multiple credit cards because you get different statement closing dates and you can spread out things rather than hitting one or two cards hard and blowing your credit utilization ratio out of the water.
[00:02:58] Speaker A: Yeah.
[00:02:59] Speaker B: Number four, you should consider asking for credit limit increase.
A lot of cards will bump you up automatically if you have a good payment history if they haven't asked for it. Now, because you have it, don't mean you have to spend it.
[00:03:13] Speaker A: Exactly.
[00:03:14] Speaker B: Number five is don't close out old cards keep them active. You don't have to use them a lot. But that additional limits helps your credit utilization ratio.
[00:03:26] Speaker A: Okay.
[00:03:27] Speaker B: Now if you're rebuilding credit, this is your go to move because once you're able to report lower balances, it will improve your score in one billing cycle. Oh, and if you do it two or three times consecutively after that, it will have a big impact on your score. And all that is is making your payment before your statement closing date so that your balance reports lower.
[00:03:56] Speaker A: Okay.
[00:03:57] Speaker B: Once again, that's the ins and outs of your credit utilization ratio is 30% of your credit score. It's the thing that you have the most control over.
Even more so I think than making your payment on time.
Because if you're unable to make your payment, it's generally because something catastrophic is happening.
[00:04:19] Speaker A: Right.
[00:04:20] Speaker B: But how much of your credit you use is totally up to you.
[00:04:24] Speaker A: Absolutely. Well, as always, you have given us some solid tips on how to manage that. And like you said, go to our archives so you can catch up on the things that we talked about the last couple of weeks as well. It is take control Tuesday.com Mansa thank you so much.
[00:04:41] Speaker B: Thank you.
