At Transparent Mortgage, we’re always looking for ways to help clients lower their credit scores. As a mortgage broker, I understand the importance of having a good credit score when it comes to applying for mortgage loans. It will impact the interest rate and terms—not to mention whether or not you qualify for a major loan at all.

The Advantages of a Good Credit Rating

Whether or not you are looking to get a new mortgage or refinance your home in the near future, you should always be looking for ways to improve your credit score as a consumer. It will make a difference when you are buying/leasing a car or applying for lines or credit. In other words, you always should be striving to have the best credit score possible.

I recently learned of this great trick that’s an easy way to improve your credit rating. It’s so simple, but it makes perfect sense. There are many factors that go into your credit score, including the number of open accounts, the types of accounts, the balances on the accounts and your personal payment history. One of the biggest factors is what they call “credit utilization” In fact, it accounts for roughly 30% of your total credit score.

What is Credit Utilization?

Credit utilization refers to the ratio of any credit card balance in relation to the credit account’s limit. Let’s say you have a $10,000 credit limit and you have a current balance of $2,000. That would equal a credit utilization ratio of 20%. Anything 20% or under would be considered a relatively low credit utilization ratio that would help boost your credit score. Preferably, you want to be under 10% for the best results.

On the other hand, let’s say you have a $1,000 credit limit with a $900 balance. That would be 90% credit utilization, which is really high and will significantly impact your credit score in a negative way.

One Simple Trick for Better Credit Scores

Here’s where the trick comes in. Even if you pay off your credit card balance in full every month, that credit utilization ratio may still come into play. People are often mistaken by the belief that paying off their credit card balances every month will lower their credit score. In some ways, this is true. However, what you need to know is that it depends on WHEN you pay off the balance.

Credit bureaus collect consumer data from creditors every single month. The data is sent when your statements are generated, not when payments are received. So, if you have a $2000 balance on your statement, that’s what the credit bureaus see. You may pay off the balance later after you receive your statement, but by then it’s too late.

The secret to success is to pay off your balances just BEFORE the monthly period ends and the new statement is generated. Online banking makes it super easy to look up your current credit card balances and to send in payments at any date. You don’t have to wait until the statement arrives. If you want to lower your credit score, make your payments ahead of time. If you pay it off in full, then you’ll have a lower (perhaps even zero) credit utilization ratio reported when the data is collected by the credit bureaus.

You can run the balances up right after, but as long as it gets paid down right before this cutoff date, your scores will reflect higher. 

What You Need to Know

It’s important to understand that if you have a bad credit history with late payments, charge-offs and collections, this trick will only get you so far. It will take a longer time and a lot more work to restore your credit rating. However, for those good consumers who keep low credit card balances and/or pay them off every month, this trick can really make a huge difference.

To learn more about this approach and other ways to improve your credit score before you apply for a mortgage loan or home refinance, contact Transparent Mortgage today. We’ll do everything we can to help you be in the best position to get the mortgage you need. Call me at (619) 929-0199.

Beau Hodson

Beau Hodson

About the Author Since 2003, Beau has been a mortgage professional and is a leading mortgage broker and lender in San Diego. As Founder and Senior Mortgage Advisor at Transparent Mortgage, he is truly committed to serving the needs of his clients and raising industry standards for integrity and transparency.