Step 4: Pay Down Balances
Naturally, if you have several credit cards and they’re all maxed out,
that makes lenders uneasy—which is reflected in your credit scores.
One of the faster ways to improve your credit score is to pay down the balances
on your credit cards and reduce credit card debt.
Lenders like to see a nice ratio between the amount of credit you have available
on your credit cards and the outstanding balances on those cards, also known
as your utilization ratio.
As a first step, aim to reduce your balances to 75 percent of your total
available credit. Then, over time, bring that percentage even lower.
Nobody knows what the perfect number is. Some experts say lenders would like
your credit card balances to be about 30 percent of your available credit,
or even as low as 20 percent. Other experts say 50 percent is okay.
Whatever a particular lender’s preferred number, all lenders want to
see that you’re making progress on paying down your total credit card
debt, not just moving it around from card to card.
But don’t go crazy. According to Consumer Credit Counseling Service
(CCCS), a nonprofit community service organization that provides financial
education to consumers (and which does receive some funding from credit card
companies):
A good rule of thumb is to allow no more than 30 percent of your take-home
pay for housing, and not more than 20 percent for debt repayment, including
your vehicle payment.
Next: Step 5 - Keep Accounts Active
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