After spending several years building a startup, I decided that it was time to get a job. So, I did! Three things happened almost immediately:
- My income quadrupled
- My spending tripled
- My credit score plummeted
For years, I’d maintained a credit score between 750 and 800. So the news came as a shock when Credit Karma began alerting me of freefall. I had no idea what was happening. All I knew was that my credit score had plummeted to 659.
Every month, religiously, I’d pay my credit card statements in full. If anything, I’d have expected my new financial behaviors to increase my credit scores! Thinking that using more credit and paying it back on time would make me more creditworthy. Right?
Needless to say, that logic was utterly unfounded. It took some digging to uncover both the cause and a solution. That said, here’s what I learned.
Credit Utilization Rate
A key metric that goes into calculating a person’s credit score is their credit utilization rate (CUR). CURs get calculated by taking the amount of revolving credit you’re currently using and dividing that by the total amount of revolving credit available to you. So, if you have a $10,000 credit line and rack up $4,000 on a credit card, your CUR for that month would be 40%.
After taking the job, my spending tripled. However, my available credit didn’t. My CUR had gone from approximately 20% to 60% overnight. Despite my timely payments, TransUnion and Equifax did not appreciate this change.
Resolving that a fix was needed immediately, I looked at my options. They seemed simple; 1) use less credit, or 2) get more credit. Either of these changes would have shifted my CUR back down. However, frankly, I didn’t like either of these options! So I kept digging.
Pre Paying Statements
Turns out, credit bureaus don’t care if you’re paying off credit card statements once they close. They look at the credit balances reported on your monthly card statement. This means that whether you pay off your balances the minute they’re issued or not, credit bureaus don’t care. All they care about are the credit balances reported on a statement’s closing date.
What I quickly discovered was that I could pay down my statement before the closing date. By doing so, I took complete control of my CUR, making sure my reported balances were between 10% and 20% of my available credit limit.
This simple shift bumped my score up 26 points the very first month! After four months, my overall credit score had been restored more than 100 points.
Additionally, most banks allow you to choose a statement closing date. I used this to my advantage by selecting statement closing dates that were several days after payday. Giving me adequate time and cash to make prepayments.
Summary
Credit bureaus only use the credit balances reported on monthly card statements to calculate a person’s credit utilization rate (CUR). If you use more than 30% of your available credit during any given month, prepay your statement before its closing date so that the reported balance is between 10% and 20% of your total available credit. Doing so can quickly and drastically improve your credit score.