Written by Mark Pontz
Recently, I spoke to a group of professionals about credit scores and management. The greatest shock amongst them was when I revealed the potential impact card usage and balance management can have on credit scores. Many people in the group mentioned that they used a specific credit card actively (meaning, a lot through the course of the month) and had “several” other cards that they did not use actively, if at all. The surprise was that this could actually cause a dip in their average credit scores. The reason for this is twofold:
Because the card is consistently over half of the available balance (when reported, regardless of the fact that you may clear it each month) it is viewed by the credit algorithms as a heavier usage.
• Additional cards with zero balances are “potential credit,” can also lower the average credit score somewhat.
Simply, the unused cards could result in a fast and potentially negative change if they were to suddenly be used heavily, increasing debt load. These may seem to be “unfair” things to impact credit scores but, at least, they are easy to fix. Here’s how to do so:
• Reduce heavy reliance on a single card. Try to keep any card you use below the halfway point in balance. Whenever possible, do not charge more than half of the available balance on a card. Try to stay at 45% of available credit in any given month.
• Make reasonable use of “stagnant” cards. If you have other cards that you rarely use, portion your “living expenses” into activity for them. Groceries, fuel, dining etc. Things that do not cause a heavy amount of usage, that you need or do anyway, is a great way to create “motion” on unused cards.
• Avoid “chasing rates” on cards. Another thing that can lower the average score is when you move a large balance around on different cards frequently. Again, this can appear as “heavy use” and it can be a negative on credit scores.
• Close cards/accounts that you “never” use. These may include cards that were opened for a discount at a retailer and never used again.
It really just comes down to common sense. Don’t overweight any one card, keep your balances as low as possible, and of course, always be certain to pay your credit cards and all monthly obligations on time. Late payments on any account will negatively impact your credit score, especially if combined with any of the potential concerns I have covered here.
Credit, like your diet and life in general, is better when well-balanced.