If you’re swimming in credit card debt, you’re probably wondering if there’s anything you can do to improve your credit rating. The good news is, paying down your credit cards is one of the best things you can do to improve your credit rating! Here’s how it works.
Every payment helps your credit score
According to Wells Fargo, your credit score is calculated based on several factors, including your payment history, credit utilization ratio, and the age of your accounts. When you make a payment on a credit card, that payment is reported to the credit bureaus. This helps improve your payment history, which is one of the biggest factors in determining your credit score.
Paying down your balance helps your credit utilization score
Additionally, paying down your balance reduces your credit utilization ratio—the amount of available credit you use compared to your total credit limit. This is another important factor in determining your credit score.
How do you calculate your credit utilization ratio?
To calculate your total c, add up all of your balances and then divide that number by the sum of your credit cards’ limits. Example of calculation credit utilization ratio :
Suppose you have 3 credit cards with the following limits and balances:
Credit Card 1: $1000 limit, $300 balance
Credit Card 2: $2000 limit, $600 balance
Credit Card 3: $3000 limit, $900 balance
Your total credit utilization ratio would be 22% ((300+600+900)/(1000+2000+3000)).
If you don’t want to do the math yourself, Omni has a free credit utilization ratio calculator.
Ideally, you want to keep your credit utilization ratio below 30%. The lower your credit utilization ratio, the better it is for your credit score.
Age of your accounts
Finally, paying off a credit card account will help improve the age of your accounts—the longer you have an account open and in good standing, the better it will be for your credit score. And Symple Lending emphasizes that paying down your credit cards earlier is a very good idea. So if you’re looking to give your credit score a boost, paying down your credit cards is one of the best things you can do!
Paying down your credit cards can do wonders for your credit rating—so if you’re swimming in debt, don’t despair! Making payments on time and keeping your balances low will help improve your payment history and credit utilization ratio, two of the most important factors in determining your credit score. So, if you’re looking to boost your credit score, focus on paying down those outstanding balances!