15 – Credit Card Hacks to Maximize Your Credit Score

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Episode Overview:

How well do you understand your FICO credit score? Did you know that if you have a high utilization on a card, your credit score is lowered even if you pay it off right away? Ken shares with you how credit card companies operate and what information is sent to credit agencies. Ken teaches you the math behind credit score and how to hack it. Ken shares his payment schedule and how he “games” the statement cycle.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy Day to you! This is Ken Kaufman, and I am thrilled you’re here for episode number 15: A Credit Card Hack to Help You Maximize Your Credit Score.

So a couple of episodes ago, I talked about the need to manage carefully the credit card float. Again, just a reminder, the way that you do this is you make sure that you are setting cash aside, (either in your budget, or in a separate bank account, if that’s how you want to organize it.) As you make each credit card purchase–meaning you have cash sitting there waiting to pay off your balance whenever you choose to do so, you don’t have to scramble, or be in a hurry, because your credit card payments’ due in the next several days. And so you’ve got to make sure to pull cash or move money around, you have it set aside, it’s ready to go. And the reason why we do this is because that impacts our net worth negatively. And when I spend money on a credit card, my networth goes down.

If, however, I am allocating cash to pay that credit card bill off, as I’m making those purchases, (again, either within my budget, or if I need a separate bank account to do it, then by all means go for that–it’s a little more complicated, but it works,) then what happens is I’m not actually hurting my net worth. I’m holding it steady, I’m incurring debt, but I’m also putting an asset there, prepared to pay it off as soon as it’s time to be paid.

And again, I recommend that this be an immediate thing, you don’t wait until the end of the month to pull all that together. As you make credit card purchases, you should be setting that money aside to make the payment; it reduces risk. And it doesn’t impact your net worth in a negative way. And this actually gets you out of the credit card float, which is the difference between “When did I make the purchase” to “when am I actually paying for it.” And however many days is in there, which most credit cards can get you from your first purchase in a statement cycle, almost 60 days until you have to pay for that purchase. It reduces risk and gets you on top of your finances so much more. And in many ways, it acts kind of like an emergency fund. And when I say that, it’s because if for some reason you weren’t able to have that cash available, you still have that spending ability, yes, it would be incurring a little bit of debt, but it gives you some cushion in your financial life if you should ever have to use it.

So get out of the credit card float. And then there’s lots of benefits that go with it. Now one thing I found is I went through this process, and this is where we’re going to get into how to utilize this system to maximize your credit score. I found that if I had a month when I had a lot of purchases on the credit card, and my focus is to try to put as much on there so I can get the rewards and the points in the cashback rewards, at least maximize those as much as I can.

When I would have a month where I’d have really high purchases, say we went on a vacation or say we had saved up for something and finally bought it–whatever it was–my balance was higher. And I found that that month, because the balance that was reported to the credit reporting agencies was higher, my credit score would go down. And as I looked into the math and understood why this was, I’ve learned really quickly that your FICO score, about 30% of it is driven by how much credit you’ve used. And relative to how much credit you have available, or this is–I think it’s kind of like a credit utilization score or a credit utilization factor, I can’t remember the exact term when they figure out your credit score–but it makes up close to a third of the credit score. And so what would happen is these months when I had a higher balance, and I always paid them off by the end of my grace period, but what got reported to the agencies was at the end of my statement cycle, whatever I’d spent during that, you know, roughly 30 day window, 31 day window would get reported to the credit reporting agencies.

So, what I found was that when my utilization was higher, my credit score would go down. But when my utilization showed lower, or these balances showed lower than it, my credit score actually went up.

And these credit card companies, they report your balance really once a month, and they’re just telling “Hey, at the end of the statement cycle, when the new statement comes out, and it tells you how much your total balances and what your minimum payment is. So you know, hey, if I want to pay the whole balance off, I pay this much. Or if I want to pay the minimum, I pay this much.” when that statement is cut, that’s what gets reported to the agencies.

And ultimately, you go into this math calculation around what is your credit utilization. And so, again, the bigger that statement balance was, the lower my credit score would be. And vice versa, the lower that the statement balance was a credit score go up. So I started to figure out how to tinker with this. And because we are working so hard to be out of the credit card float, I had cash available, so that I could play with this and see what happened.

Before I explain that, let me explain the math now on credit utilization. Let’s say that you have multiple credit cards and in total, you have $10,000 of limit on all those credit cards that’s reported to the credit reporting agencies every month, how much credit you have available to you. Now, you have to
then look at the other part of the equation, which is how much credit you have used. So let’s say that you’ve spent and on your statement, it shows that you owe five times one thousand dollars on those credit cards very simply $5,000 of what you’ve used, versus $10,000, which is the total you could have used, it shows you a utilization of 50%. Or if you’ve only spent $1,000, then you $1,000 divided by $10,000 is a 10% utilization. And the lower that percentage is, the better your credit score is.

So there’s a couple of ways to mess with this and tweak it and hack it and try to make your credit score look better. One is: increase your limit. So call your existing credit card companies and say hey, I want more limit, can I get more limit? And you know, there’s questions they ask and you go through that process. So you can increase your limit; nothing wrong with that.

The other thing you could do is you could decrease the amount that shows up on your statement cycle. And so in the spirit of simplifying and not having too many credit cards, (and I’ll get into sort of the philosophy and the details around how that’s structured in future episodes,) but I’ve really settled in on how many credit cards I’m comfortable with, and really where that credit limit needs to be and not continue to ask and push for more, because I find if you don’t use it, a lot of times credit card companies start to take it away anyway. So what I do is I have a reminder on my Tasks. And on one of my credit cards, the statement cycle ends on the seventh of every month. And so on the sixth of every month, I have a reminder, (task) that pops up right on my phone, on my computer, and it tells me pay down the entire balance on this credit card. I have another one that ends, the statement cycle ends on the third. So on the second of every month, there’s a reminder. It pops up on my phone on my computer, and it says pay off the balance, whatever it is. And the reason why I do this is because I am trying to play a little bit of a game or gaming the system. So that when my statement cycle closes, and the credit card company says here’s what your balance is, I want that to be as low as possible. So if it’s the sixth of the month, and I get my reminder that hey, your statement cycle closes tomorrow on the seventh, pay down everything that you can. And I go and look up in my credit card online, it says that I owe $2500. I paid $2500 that day. And then whatever transactions close–or I should say they go from a pending status to a fulfilled status, whatever that terminology is. Whatever happens then between the sixth and the seventh, so on the seventh, whatever transactions then come through on my statement, that’s all that my balance is. So say it’s $100 of additional no charges that clear on my credit card on the seventh, then my statement is $100, not $2500. And from a credit utilization perspective, that’s really low. Now say I have $10,000 total credit available, and I show I have only $100 of balance. Well, that’s a 1% utilization, the reporting agencies send that information, that hundred dollars on $10,000 of limit. The credit card company sends that to the reporting agencies, and your credit score goes up because there’s a perception that you’re managing your credit, well, you’re not over utilizing it. And if there’s some hiccup, or tragic thing that happens or some problem that happens in your life, that causes a financial crisis, you don’t have this big balance on your credit cards that you can’t pay, or that could put you in risk of default, or cause other financial challenges. So you look like a better credit risk. And as a result, your credit score goes up.

So this is the hack. The formula works on both sides of it, where you can either increase your limit, which is fine go and do that. But the real hack is since you’re setting the cash aside anyway, and what we ultimately care about is our net worth, so it doesn’t matter if that money is sitting in your bank account, or if it’s paid off your credit card. Net net, it’s the exact same result in your net worth. Why not play this game of pushing down how much you owe right before your statement cycle closes? So that what gets reported is a very small balance. And your credit utilization then looks very, very good, very strong. And your credit score goes up over time.

So there it is. That’s the credit card hack to maximize your credit score. And this is all while you’re managing your credit card float and the potential impact that could have on your net worth–you’re managing that flawlessly like a boss.

In future episodes, I’m going to stay on this credit card thing. I’m going to discuss how to pick the best credit card, how many credit cards you should have. I’ll go into details about which ones I use and how I use them to try to maximize points and rewards as well as credit score and all these other things. And then I’m also going to dedicate an episode to how I get my kids into the credit card game, how to get them to understand it and how we help them start building a credit score and some details around that.

So make sure to subscribe to the podcast so you don’t miss those episodes as well as all the future ones, once I get past kind of this credit card rant I’m going to go on for the next several episodes. Many many thanks to you for joining today. This is a wrap for Episode 15.

Happy day.

Transcribed by https://otter.ai and Ashley, the most valued employee at Kaufman Family Inc.

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About the Podcast

Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.

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