Your credit score is important.
The higher it is, the lower the rates you’ll get for borrowing money – mortgages, car loans, student loans, etc.
30% of your credit score is based on how much you currently owe.
But it’s not a dollar amount, it’s the percentage of available credit currently being used, also known as your utilization rate.
A credit card is an easy example.
If your credit limit is $100,000 and you have a $10,000 balance, then your utilization rate is 10%.
(That’s a good number. Anything under 30% is viewed as favorable by lenders.)
Alternatively, if your credit limit is $20,000 and you have a $10,000 balance, then you’re at a 50% utilization rate and you’ll get lousy rates if you borrow money (if you can even get a loan in the first place).
So an easy way to improve your credit score is to call your credit card company every 6 months and ask for an increase in your credit limit.
As you ratchet up your credit limit, your utilization rate will drop because the denominator is getting bigger.
Now, if you’re reading this, you’re a Financial Zen Master which means you pay off the FULL BALANCE of your credit cards EVERY SINGLE MONTH.
So you might be thinking this doesn’t apply to you, but even though you smartly don’t carry a credit card balance, whatever the balance is when FICO takes a snapshot is what they’ll use.
That means, your denominator still matters and you want it as big as you can get it.
