Hack your Credit Utilization Ratio to Improve your Credit Score

Let’s talk credit score hacking.

For better or worse, credit scores are important. How you score can impact whether or not you get credit, the rates you get on approved credit, and even whether you get a job or not (sadly, about 40% of employers pull applicant credit scores). It should go without saying that improving your credit score is a good thing.

Unfortunately, millennials have a particularly challenging time getting access to credit and improving their credit score because they don’t have a long history of income earning and their credit history can be short, if existent at all.

At the same time, millennials are saddled with debt, typically in the form of student loan debt and/or an auto loan. And they’ve opted for debit cards versus credit cards.

The result creates a very high credit utilization ratio (calculated by taking total amount of debt and dividing it by total available credit). TransUnion recently did a study that shows that millennials have the highest credit utilization ratio of any generation, at 79%.

credit utilization ratio

Why is this significant?

Credit utilization ratio makes up a significant portion of your credit score (23%+) – whether it’s FICO, VantageScore, or otherwise (tip: if you’re not sure what your credit utilization ratio is, Credit Karma and Credit Sesame will show you, for free).

It’s generally recommended to keep your credit utilization ratio below 30%, but the lower the better (mine is around 1%).

If your use of credit is fairly consistent, the only way to lower your credit utilization ratio is to get more credit. And the easiest way to get more credit is to ask for it from a current or future credit card provider. This could take the form of:

  1. asking a current credit card provider for a credit line increase
  2. applying for additional credit cards

With #1, the main factor under consideration will be your current income level. If it has increased since your credit line was last considered, there is a good chance the provider will increase your credit line.

With #2, I’d recommend that you try credit providers other than your existing ones, who may want to split your existing credit line between multiple cards.

This is not a risk-free, foolproof strategy. There are a few rules that you must follow to make it work for you:

  1. Always pay your credit card balances in full. If you can’t, you shouldn’t have credit cards.
  2. Only use credit cards if they don’t increase your spending habits. To avoid temptation, you could use the cards for automated monthly expenses and simply cut the cards up and not use them for anything else. If you do use them, only use them on necessities.
  3. Keep the accounts open. Length of credit history is also a significant scoring factor. So it’s generally best to open the accounts and keep them open.
  4. Avoid new cards with annual fees to make this a no-cost strategy.

For millennials with limited credit history and a low average credit account age, this strategy can work wonders over the long haul by simultaneously decreasing credit utilization ratio, increasing the average age of accounts (this will come with time), and showing a history of on-time payments. These are 3 of the biggest credit scoring factors, and you are positively addressing all 3 with this strategy, over time.

Before implementing this strategy, some additional caveats:

  • Those with a history of poor credit probably won’t be able to utilize this strategy because they will have a hard time getting access to additional credit lines. And if you have a poor credit history, you should probably avoid additional credit cards anyways.
  • This strategy can negatively impact your credit score in the short-term because it will result in hard credit inquiries and lower your average age of account. I’ve found the credit score impact of opening a new credit card account to be minimally negative, but it can still be negative. So if you will be applying for a new loan in the short-term, it’s probably best to wait until after getting approved to try this strategy.
  • While this strategy has worked effectively for me, everyone’s credit situation is different. I can’t guarantee this strategy will have the same results for everyone. Use at your own risk, based on multiple sources.

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