The 30% Rule: What It Is and Why It Could Save Your Credit Score

Sophie Miura

When it comes to your finances, do you take a head-on or head-in-the-sand approach? If you identify with the latter, then the good news is, you're not alone. The bad news? You're not alone. New data suggests that when it comes to managing money, women are not as independent as you'd expect. In fact, 91% of women in couples are not participating in financial decisions. But we want to change that statistic. To help you become a master of your own finances, we're debuting a new series called The Paper Files, where we uncover tricks and tips that will help you manage your money and your future. Ready to take it head-on?

One number has the ability to completely change your future, whether it be by granting you approval for an apartment or causing you to get stung with a sky-high interest rate: your credit score. As crucial as it is, studies suggest the average person still doesn't understand their score or how their daily habits influence it. 

The truth? It's not a mysterious abstract number. You do have the power to increase your score, and there are a number of simple steps you can take to improve your financial future. According to Bethy Hardeman, chief consumer advocate at Credit Karma, boosting your rating comes down to five rules. Here, she talks us through these rules and highlights the most common mistakes that could drag down your score.

Take note: These seemingly harmless financial habits could cost in the future. Here's how to change them. 

Mistake 1
Thinking It's OK to Max Out Your Card If You Pay Off the Balance

If you only commit one point to memory, this should be it. "Your credit utilisation—the amount of debt on your credit cards divided by all your credit limits—is one of the biggest factors of your credit score," explains Hardeman. Therefore, the amount of money you put on your credit card is crucial in determining your score. 

Yes, paying off the balance of your credit card in full shows that you're reliable, but that doesn't mean you can spend the maximum amount each month. "Keeping this ratio low is often one of the easiest ways to improve your credit." She recommends the 30% rule, which involves "keeping your balances under 30% [of your credit limit], although less is better," she says. 

Change it now: 

Set aside 15 minutes to look at your spending records. Take note of your credit limit and calculate what 30% of that figure is. That number is the maximum amount you should ever charge to your card. Write the number in your phone or somewhere you check regularly, and refer to it whenever you check your credit card balance. 

Mistake 2
Not Asking to Increase Your Credit Limit

If you struggle to stick to the 30% rule because your credit card limit is low, Hardeman says it's smart to request an increase. "A good way to keep your credit utilisation rate low is to ask for a higher credit limit. If you have a good record of paying your bills on time and in full, your bank will be happy to increase your credit limit. Just make sure this doesn’t tempt you to overspend!"

Change it now:

Choose one card to request a limit increase. Call your credit card issuer and explain your case. Don't tell them why you need it, explain why you deserve it, Cardrates recommends. Highlight that you've been a long-term loyal customer, regularly pay your balance in full, or that your income has recently increased.

Mistake 3
Thinking You Have to Carry a Balance to Build Credit

This is a common myth, says Hardeman: "You don't need to carry a balance to have a great credit score." Instead, she says this simply hurts your back pocket. "Using your credit cards and paying off your balances in full every month will show you're using your credit responsibly. Carrying a balance every month will just cost you interest, and you don't need to pay interest to build credit."

Change it now: 

Paying off charges in full should be more manageable now that you've lowered your credit card utilisation. Aim to pay off the balance in full at the end of your billing period to avoid unnecessary interest charges. 

Mistake 4
Closing Your Old Credit Card

Just because you got a new credit card with better rewards or a more competitive interest rate doesn't mean you should close your old one. "While it may seem responsible to close credit cards that you no longer use, closing accounts could lower your credit score," says Hardeman. "One of the factors that goes into calculating your credit score is the average age of your accounts. Closing a credit card might not affect your credit score right away, but it may impact it later."

Change it now:

Create a spreadsheet that lists all of your credit cards. Note the rewards, interest rates, and any fees associated with each card. Pay special attention to your older credit cards, and make sure you're still meeting the requirements to keep this card open while minimising fees.

Mistake 5
Paying Your Bill Late

"Your payment history is the most important factor that goes into calculating your credit score," says Hardeman. If you struggle to pay the balance on that date, talk to your bank. "Banks work hard to attract and keep customers. If you have an inconvenient due date, you can ask to have it changed, especially if it will help you pay your bill on time each month."

Change it now:

Look at a copy of your payment history alongside your calendar. Is there a reason you've been missing the deadline? If you believe shifting the date might help, contact your bank and see if it will let you change it. 

Do you adhere to the 30% rule? Tell us if you think it's realistic.

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