Credit is not ‘set it and forget it.’

Video Transcript

The credit score, more specifically the FICO score, is made up of 5 factors.

Let’s break down the second most impactful of these factors, credit utilization. So, credit utilization is just a fancy way of taking a look at the amount of available credit you're actually using. And this is one of the ways that lenders can see how big of an overall risk it is to lend a customer more money.

This factor makes up about 30 percent of your credit score and when people ask me, "what is the best way to improve their credit score?" I say just do these two things, pay down your debt and pay it down on time. And it's because the first two factors of your credit score, your payment history and your utilization, they affect 65 percent of your credit score. That's nearly two thirds of the overall score.

So you can see why just doing these two things will have the biggest impact on your score. And like I mentioned earlier utilization is the amount you owe relative to the limits on your credit cards and starting loan balances, and this is often referred to as your utilization rate.

The typical rule of thumb is to keep your utilization rate under 30 percent. So what this would mean is if you have a credit card and it has a limit of $10,000 dollars, you would aim to have a balance lower than $3,000 dollars. But just keep in mind, the lower your utilization rate, the better, because this doesn't mean carrying a balance equal to 30 percent gives you the best credit score, this is just a general rule and a threshold you don't want to exceed.

Paying off your balances each month will be the best for your finances and your credit score.