Most consumers know that by paying their bills on time, they can avoid the pitfalls of bad credit. But others with bad credit may be shocked to find that their score may be low through no fault of their own.
Beyond late payments, one of the factors that credit cards take into account is a “utilization ratio,” according to U.S. News and World Report. This number essentially measures how much of one’s available credit one is using. For example, a consumer who charges $500 in a month to a credit card with a maximum of $5,000 is using 10 percent of their credit – a good number that won’t adversely affect any scores.
The thought process is that a consumer maxing out their cards every month could be a high risk for a lender – even if they make payments consistently. However, some credit cards compound the problem by changing the number they report.
Rather than report the $5,000 maximum on the card, these will report the highest amount a user has ever charged on a card as the upper limit. So if a consumer once charged $750 to a card and charged $500 this month, that buyer’s utilization rate would be artificially inflated to 67 percent – something that will hurt a credit score drastically. The companies do this in order to justify charging higher interest rates.
Those with bad credit should ensure that their credit card reports the correct maximum rather than the highest amount charged – and if it doesn’t cancel or switch to a card that does.