Question: I understand that I need a credit score of at least 720 in order to qualify for the best interest rate on my mortgage when purchasing real estate. I pay my bills on time and in full each month, but I cannot get my score to budge from 705. Why is that and how can I avoid this?
Answer: Paying your bills on time is not always the way to achieve a 720 credit score. In fact, credit bureaus determine your score by using a formula comprised of 22 criteria.
To increase your score, try lowering your utilization rate, which is the debt you carry in proportion to your balance. Your utilization rate on any one credit card should be no more than 30 percent of your limit on any given day. For instance, if you have a $10,000 limit on your Visa, keep your balance at or under $3,000.
If you pay your balance off each month, you might assume that it does not matter whether you exceed the 30 percent threshold. Beware of this assumption. Your credit score changes from hour-to-hour, day-to-day, so keeping your utilization rate above 30 percent on any given day hurts your overall score.
Why 30 percent? Lenders want a fair assessment of whether you will pay back your debt. The higher your utilization rate, the more financially strained the credit bureaus think you are.
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