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CREDIT UTILIZATION RATE AND HOW IT AFFECTS YOUR CREDIT SCORE

 

Whether you decide to hire someone to fix your credit or to do it yourself, the credit utilization rate is one of the things you need to understand if you want the credit repair process to be a success. So, what exactly is CREDIT UTILIZATION RATE?

Credit utilization rate is the ratio of your outstanding credit card balances to your credit card limits. It primarily focuses on the borrowers’ revolving credit. Simply put, it is a measure of how much of your available credit limits you are using. To calculate your credit utilization ratio, divide your credit card balance by your credit limit, then multiply by 100. 

For example, if you have a $5,000 credit limit and spend $1,000 during your billing period, your credit utilization rate will be 20% ($1,000 divided by $5,000 – multiply that number by 100 to get the percentage.)

Why is it important to understand Credit Utilization?

Your Credit utilization rate amounts to 30% of your overall credit score. That is a high percentage, so it makes perfect sense that more attention should be given to reduce your credit utilization rate. The higher your credit utilization rate is, the more negative the impact will be on your score. To keep your utilization from harming your score, you need to keep utilization around or under 30% of your available credit. In building up your credit, balances should be under 10-15%, with the ideal being 1-2%. You also want to show credit responsibility, so it’s significant that you use the cards regularly and make all of your payments on time, keeping your balances as low as possible. Keep in mind that the main reason why the concept of a credit score was created, is for lenders to determine the likelihood that you will repay what you borrow. Therefore, the system looks to see that you’re not overextended in credit card debt and living beyond your means. That is why maxing out your cards is not a good idea because it will definitely lower your score. On the other hand, showing more available credit will increase your score.

How you can keep your Credit Utilization below 30%

One of the reasons why a credit score may not show positive results even after availing credit repair services is because the importance of credit utilization may have been overlooked. Take into consideration that it is 30% of your overall credit score. So here are a few suggestions that can help you keep your credit utilization rate below 30%:

  • If you’re carrying high balances, a quick trick to increase your score is to pay your balances down to below 25% of the available credit limit of each card and never spend any more than that, even if you pay the bill off in full each month. 

  • Decrease your spending.
  • You can use a personal loan to refinance your credit card debt.
  • Request for a higher credit limit.
  • Apply for another credit card.
  • Do not close your credit card accounts after paying them off completely.

Remember: Since your Credit Utilization makes up for 30% of your credit score, as soon as you reduce your credit card balances or increase your credit limits, your credit utilization will decrease, and your credit score will go up.

 

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