Building and maintaining good credit are an important part of financial health. Good credit and bad credit can make the difference between owning your home or renting an apartment (or worse, not being able to find anyone to rent to you). Not to mention that if you want to finance anything, be it a vehicle or a new business, if you have good credit your interest rate will be much lower than if you have bad credit, which can add up to thousands or tens of thousands of dollars in savings. This is my business because this interest you’re paying on your cards is money you could not only be keeping in your pocket, but money you could be making money on. There’s more to credit than paying bills on time. That is a big part of how your score is calculated, yes, but many people don’t realize just how much their credit utilization impacts their score. It’s an enormous factor, weighing in at about 30% of your FICO score.

What is credit utilization?

Credit utilization refers to how much revolving credit you use. Basically, it refers to how much of your credit lines you’re using up. If you have $500 charged to a credit card with a limit of $1000, your utilization is 50%.

Why does credit utilization matter?

When you’re being considered for credit, lenders not only like to see that you’re paying your bills on time, but also that you aren’t using up too much space on your cards. Sure, you can pay your minimum payment on time for your cards, but if you’re using 90% of your credit limit, that throws a big red flag up to the credit bureaus and lenders that perhaps you’re stretched too thin and could be a credit risk. Healthy credit will have a utilization of under 30%. Fantastic credit has a utilization rate of closer to 10%. Let’s be clear here though: 0% utilization is no good either (That would be too easy!) The point of credit scores is to demonstrate that you’re able to use credit responsibly, not that you don’t use it at all. Cutting up your cards or closing accounts is more than likely going to hurt your score. You also don’t want to use your card and pay it immediately, because you need time for the credit card company to report your credit use to the bureaus. Whether you’re working to repair broken credit or building new, it doesn’t have to be laborious and complicated. The issue people run into is when they get a new credit card, they use it to spend money on “extras”. When you stop viewing your credit card as money to be spent and start treating it as a tool to prove your creditworthiness, you can not only avoid carrying too much debt and paying a ton of interest, but you can easily raise your score within just a few months. The bill pay pass-through is a simple way to build a great credit score.

Bill pay pass-through: Automate it all!

I love automation. You can easily build your credit without too much headache. It’s not a quick fix, but done correctly, it can have a huge impact on your score within just a few months.

Step 1: Pay down your balances.

You didn’t think you were going to get to skip this part, did you? You’ve got to get those cards paid off. If you’ve got a lot of debt, you need to start with the debt snowball. The debt snowball is the most widely known method of paying down lots of debt, and it works. Set up your cards to have the minimum balance paid on all of them, on time. Use all your extra funds to pay your smallest balance. Once that balance gets to zero, move on to the next balance. People like this method because by paying the smallest debts off first, it helps build momentum and motivation. (Note: when I did this, being a numbers person, I chose to start with the balance with the highest interest rate. That will probably save you slightly more in fees, but the point here is to just focus on one at a time, while paying the minimums on the others. The one you choose to tackle first really doesn’t matter much, as long as you just get going on it.) Once one credit card is paid off completely, you can begin automating your awesome credit score.

Step 2: Ditch the card.

Congrats, you’ve paid off a credit card! You may have already seen an increase in your score by bringing your credit utilization down. Don’t cut the credit card up or close the account. Do, however, put the card somewhere safe, or if you can’t be trusted not to use it, give it to someone who will keep it safe for you (someone you really trust, like your mom) or put it in a safe deposit box, or freeze it, or something. Do not put it in your purse or wallet. It’s not for casual use anymore; it’s a tool to build your credit.

Step 3: Choose an appropriate bill.

Now, we’re going to use this card to automatically build your score. Choose a bill that’s close to 10% of the card limit. If it’s a card with a $1000 limit, you’d want to choose a monthly bill that’s around $100. It doesn’t need to be exact; in fact, keeping it slightly under 10% has been said to be even better, but the exact metrics used by credit bureaus aren’t always clear to consumers. If you’ve got a card with a lower balance, use it to pay something like your Netflix account, or use it to make a partial payment on a larger bill (you will, of course, have to pay the remainder with your checking account or whatever you use for your normal bill payments).

Step 4: Set up auto bill pay, using that card.

Do you see where we’re headed? We’re going to use this card for this bill (let’s say it’s your cell phone bill) and only for this bill. Your mama is holding your card, so nothing else will be charged to it. You’ll be using only roughly 10% of the credit limit every month.

Step 5: Set up auto bill pay for the credit card.

Now we pay the full balance on the credit card, on time, every month, just like we did the for cell phone bill before (hopefully), but now instead of just paying the bill for cell service, we’re also showing lenders how responsible we are by using credit and paying the full amount like clockwork. Set up your auto pay for the card on the payday before it’s due. Be sure to only pay the credit card balance after you receive your statement, not before. This is important, because you have to leave the charge on the card long enough for bureaus to see you’ve used the card. Your balance is generally reported when they send you your statement.

Step 6: Leave it alone, reap your rewards, and repeat

Here’s a big mistake I see people making (and I’ve admittedly made myself in the past): paying down credit card balances, then promising to only use the card for gas or something, and predictably charging the balance right back up to a utilization rate that is damaging to their credit score. When you keep your credit card in your wallet, you’re setting yourself up to be right back where you started, because there’s always going to be a great deal or impulse buy lurking nearby. The bill pay pass-through keeps your budget on track by simply paying the bills you’ve always been paying, but by passing the payment through your credit card, you simultaneously build your credit. Follow the steps provided here, then repeat it with all your cards, and your credit will be in great shape before you know it, with minimal effort on your part.

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