Do you want a quick way to increase your credit score without paying more off more of your debt?
Here’s a way to improve your credit with a phone call.
What is this sorcery? And how does it happen? This magic happens by tweaking your debt to credit ratio. First, let me explain what a debt to credit ratio is, and why it’s so important.
Debt to Credit Ratio
Your debt to credit ratio is essentially the percentage of your credit that you are using. It is calculated by dividing how much credit you are using, on all your credit cards, by how much you have available, on all your credit cards. It is super important because it accounts for 30% of your credit score.
For example, I have two credit cards. The first one has a credit limit of $10,000, and a balance of $4,000. The second one has a credit limit of $3,000, and a balance of $2,400.
To calculate the debt to credit ratio, all you have to do is to add what you owe on all your credit cards, — in this case $6,400 — and add all the credit you have available — in this case $13,000 — and divide the former by the latter.
$6,400/ $13,000 = 49%
The Magic Trick
To get a better score, without taking any money out of your pocket, all you have to do is call all your credit card company and ask them to raise your credit limit. This changes how much credit you have available, which will directly impact your debt to credit ratio.
Continuing with the example above, imagine you called your first credit card company and they increase your limit from $10,000 to $15,000. You did the same with your second credit card company and they increased your limit from $4,000 to $7,000. Your debt is still the same, $6,400, making your new ratio 29%. Since it is now under the 30% threshold, your score will automatically increase the next time the agencies recalculate your score. Your credit score is calculated every 30 days.
$6,400/ $22,000 = 29%
To put this in perspective, let’s imagine you were trying to qualify for a mortgage, and you wanted to get the best interest rate possible. On a 30-year fixed mortgage for $300,000, the difference in interest paid between an interest rate of 3.5% and 4.0% is $30,640 over the life of the loan. So, it is essentially like making a $30,000 phone call.
Word to the wise; when doing this you must be disciplined. It can be tempting to spend more. Resist the urge! If you don’t, it will undo anything you will gain, and could easily make this situation worse. However, if you just need a little push, it is a prime example of working smarter, not harder, which is the mantra of the financially free.