What is Credit Utilization?
When it comes to your credit, utilization is the amount of credit you use compared to the total amount of available credit you have. Here’s what that means.
When you open a new credit line such as a credit card, there is typically a set cap on how much you can spend. For example, if you have a credit card limit of $10,000, then your utilization is the ratio of your revolving balance as it compares to your 10K limit at the end of each billing cycle.
What is a Good Credit Utilization Rate?
A good utilization rate is a revolving balance at or under 30% of your limit each month. Using the scenario above, 30% of a 10K limit would be $3,000. Therefore, if you’re looking to achieve excellent credit, your balance should never exceed this 3K threshold. Keep in mind that a good rate isn’t necessarily about how much you spend. It’s about how much of a monthly balance you carry. For instance, if you charge all or most of your credit limit in a single billing cycle, it will only damage your credit if your end-of-month balance exceeds 30%, or $3,000. Comparatively, anytime you pay off your balance in full (big or small) it could help you improve your scores.
How to Calculate Your Credit Utilization Rate
If you’re like most, crunching complicated numbers probably isn’t at the top of your fun list. However, calculating your utilization rate is actually pretty simple. First, take the total balance you spent and divide that number by your credit limit. Next, take that total and multiply it by 100 to get your percentage rate. Do this for each credit card or line of revolving credit you use to discover your utilization rate percentage. To demonstrate, here is the utilization rate formula:Total balance ÷ total credit limit = credit utilization x 100 = %.
How Utilization Can Impact Your Credit Score
If your credit utilization percentage is too high (i.e. above 30%), lenders may view this as a sign that you may be living beyond your means. As a result, a high utilization rate may make you a less desirable loan candidate and could also negatively affect your scores. Alternatively, a low percentage rate does the opposite. It shows that just because you have the funds available, doesn’t mean that you will spend every penny. Additionally, the more unused, available credit you can responsibly manage, the more likely it may be for you to experience a positive impact on your credit scores.
Tips to Improve Your Credit Utilization Ratio
If your utilization rate is too high, here are some tips you can use to help you improve your numbers.
- Keep tabs on how much you’re charging: Make a weekly budget and don’t spend more than you can afford.
- Set up payment reminders: Use autopay and/or set up payment reminders to ensure that you never miss a due date.
- Pay above the minimum amount required: For best score results, pay your entire statement balance in full each month. If you have to carry a balance, strive to always pay more than the minimum amount due.
- Make payments twice a month: An extra mid-month payment is a great way to help you get you closer to that 30% or under goal.
- Request an increase in your credit limit: If you remain at the same level of spending each month, having more available credit on the lines of credit you already have could help you lower your rate.
- Avoid closing accounts: Closing an account won’t only decrease the amount of available credit in your name, but it may also reduce the number of years you’ve been building credit. Both of these scenarios could damage your scores.
Let’s Sum Things Up
The utilization guidelines above apply for all lines of revolving credit. This includes, credit cards, some personal loans, or any line of credit that does not have a fixed number of payments. Therefore, if you’re looking to keep or get a higher credit score, be sure to keep your credit utilization rate at or under 30% across the board. For more tools you can use to help lower your utilization and potentially increase your credit scores, click below to get started with your free credit report and score.