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Once you ditch your debt using bankruptcy, the next step is rebuilding your credit. Getting credit cards and using them wisely is key to re-establishing your credit as fast as possible. The downside to being so deep in debt that you turn to bankruptcy is that you might be gun shy about credit cards. In most bankruptcy cases, excessive spending isn’t the cause – it’s a symptom. The simple truth is, credit cards are the fastest route to rebuilding your credit score, but must be used strategically, and credit card utilization is key.
What Is Utilization?
The word utilization means usage. Regarding credit cards, utilization is calculated as a ratio of credit being used to credit lines. The technical term is “credit utilization ratio, ” but in discussing credit cards and scores, it’s commonly called just utilization. For FICO and Vantage score calculation purposes, utilization is calculated and considered across all your revolving credit lines. Here’s a look at how to figure out your utilization.
For example, let’s say you have five credit cards. Two of the cards have $500 credit limits because they’re starter cards that you got when you began rebuilding your credit. Then let’s suppose you have another that’s $800, another that’s $1,000, and your highest limit is $2,500 because you built up your score using the other cards and finally got a higher limit on your most recent card. Your total credit lines equal $5,300 (500 + 500 + 800 + 1,000 + 2,500).
How Much Is Your Utilization?
Given the assumption of total credit lines of $5,300, let’s then say you’re carrying total debt of $2,000 spread across your cards. To figure out your utilization, use the ratio of 2,000/5,300. In this scenario, you’re using 37.7% of your available credit. This is enough to lower your FICO score. Ideally, you should never go over 25-30% of your total credit line. In truth, the lower your utilization, the better. However, you should still use your cards so they have activity.
Utilization is a double-edged sword. If you don’t use your credit cards, card issuers have no incentive to allow you to keep the accounts open or to reward you with credit line increases which help raise your score. On the flip side, if you over use your credit cards, you can find yourself in the predicament of excess utilization and lower your score.
How Credit Line Increses Help Utilization
Using credit cards to boost your credit score means using them responsibly but regularly enough to keep your card issuers satisfied so they will give you credit line increases. One strategy is to use your cards to pay for items you normally pay cash for – and then pay off the cards before any interest can accrue. That means you’re using the cards but not racking up interest charges so it’s the same to your personal bottom line as paying cash.
For instance, if you pay your monthly cell, electric, water, gas, and other standard bills using your credit card, that gives you spending history without using your cards for things you don’t need or can’t afford. Usage doesn’t have to equal utilization. By paying your cards off in full each month, your utilization can be zero which is good. By having activity on your cards, issuers are likelier to offer credit line increases. This means if you ever do need to carry a balance, your utilization can remain low.
Given the scenario above with $5,300 in credit lines and a $2,000 balance, that means 37.7% utilization, which is excessive and can harm your FICO and Vantage scores. Now imagine you were using your card regularly and responsibly and all of your card issuers rewarded you with double the credit lines. That means you could have $10,600 in credit and that same $2,000 balance now represents just 18.8% utilization. That’s a buffer that can help protect your score.
To find out more about improving your credit score after bankruptcy, contact Credit Score Keys today for a free consultation. Call (888) 659-3226 to set up an appointment at your convenience.