Having a money savvy credit score which is hotter than your ex...
I couldn’t think of a sensible enough title for such a dull topic, however, here you are reading this as you wonder which financial tip is going to transform your credit score into a 10/10...
As all millennials know, having a healthy credit score is a crucial component to landing a mortgage for the property of your dreams - most loans for that matter! When a guy asks a girl out on a date, he doesn’t know her....actually he doesn’t know a thing about her. Soooo, he may consult her friends as a way of qualifying whether she is a good match (in 2017 we call that stalking her on Instagram). In the same way, a lender will consult your credit score as a way of calculating if you are worth the risk!
THE TRICK: The "30% Rule"....
Keep your 'credit utilisation' rate under the magic 30% threshold. What am I on about? This is known as the total amount of debt debt across your credit cards divided by ALL of your credit limits.
For example, if you have a one credit card with a limit of £1,000, then make sure your overall balance at any one time is no greater than £300 aka 30%. By the way, this ‘rule’ doesn’t mean that at 29% your a legend and at a 31% rate your credit score looks like Donald Trumps hair do. In reality, this 30% figure is an oversimplification of what actually goes on behind the scenes, however, it's a great rule of thumb. What I am trying to say is….the lower the utilisation rate, the better!
Cheeky tip: Assume you have 2 credit cards with the exact same credit limits. If you have a high utilisation rate on one credit card, however, have an extremely low rate on another because you rarely use it, closing the unused card can actually increase your utilisation rate - So, think of your credit cards as a ‘portfolio’ rather than just individual pieces of plastic.
The aim of the game is to show the money hungry banks and building societies than you are a Sensible Sally with your finances. If you buy a credit card to simply purchase the latest Yeezy trainers along with other luxuries, hey i'm not a hater, however, if you are continually on the brink of your credit limit, the powerhouse financial institutions begin to compare your money management skills to MC Hammer’s back in the 90’s (click here to demystify this reference).
USE SARAH AS AN EXAMPLE TO ESTIMATE YOUR UTILISATION RATE:
- Sarah has 3 credit cards each with a limit of £1,000, giving her a total credit limit of £3,000
- Sarah has a £200 balance on card 1, £400 on card 2 and £900 on card 3. This gives her a grand total of £1,500
- Her credit utilisation rate is therefore…(£1,500 / £3000) * 100 = 50%
If Sarah were to close the card with the £200 balance - she is indeed left with a lower balance and one less credit card, however, her utilisation rate has now hit 65%! This has the ability to deteriorate her credit score even further....
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