Credit Utilization: How to Improve It

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What is Credit Utilization?

Credit Utilization is the ratio of your total credit card balance to your available credit limit. This number helps lenders understand how much of your available line you're using, and it's a key factor in determining what interest rate they'll charge you. If you keep a low balance on your cards, that will help you maintain a good Credit Score.

How a Credit Utilization rate affects your credit score ?

A credit score is a numerical representation of the information in your personal financial history. It's calculated from your spending habits, and ranges anywhere from 300 to 850-- though if you're over 18 years old with no criminal record, anything under 650 should be enough for lenders to approve loans or mortgages.

A credit score can range between 300-850 points - but it doesn't matter how high that number may get; according to law passed by Congress back in 2003 (the Fair Credit Reporting Act), nobody has access to see who gets what when they go shopping around for financing deals at their local lender.

There are five major factors that impact your credit score

There are five major factors that impact your credit score:

Payment history (35 percent)
Level of Credit Utilization (30 percent)
Age of your credit (15 percent)
Diversity of your credit (10 percent)
Number of credit inquiries (10 percent)

Calculate your Credit Utilization Ratio

Your Credit Utilization Ratio is the amount of debt on your credit card divided by the total limit on that card. To calculate this, just divide the balance on your account by the limit. For example, if you have $10,000 in debt and a limit of $25,000 then your Credit Utilization Ratio would be 40%. This means that 40% of all available lines are being used for purchases or cash advances. The lower this percentage goes down to under 10%, the better! However, anything over 30% will affect how well you can borrow money in future as lenders see this as an indication that you're struggling financially with managing your credit.

An Example of Credit Utilization Ratio

Below is an example of how a Credit Utilization Ratio is calculated. Say a borrower has three credit cards with different revolving credit limits.

Card 1: Credit line $5,000, balance $1,000
Card 2: Credit line $10,000, balance $2,500
Card 3: Credit line $8,000, balance $4,000

The total revolving credit across all three cards is $5,000 + $10,000 + $8,000 = $23,000. The total credit used is $1,000 + $2,500 + $4,000 = $7,500. Therefore, the Credit Utilization Ratio is $7,500 divided by $23,000, or 32.6%.

What is a good credit card utilization ratio ?

A good credit card utilization ratio is typically considered to be less than 30%. This means that you should never use more than one-third of your available credit on any given month. Utilizing too much of your available credit can negatively affect your score, so it's important to keep this ratio as low as possible.

A high Credit Utilization Ratio can also lead to increasing interest rates and late fees from lenders. Keeping a lower balance on your account will help you maintain a healthy score, avoid penalties, and save money in the long run.

How to improve your Credit Utilization rate?

Credit Utilization is the ratio of your debt to your credit limit. It can also be interpreted as how much of your available credit you are using at a given time, which can affect not only your score but also the interest rates and fees associated with any new or existing loans. Typically, someone who has a high Credit Utilization rate will have a lower score because it indicates they're taking on more debt than what their income allows for. But there are ways to improve this situation.

1. Pay down your debt

Paying down debt is the most important step you can take to help your credit score. To do so, make sure that every month on each of your credit cards you're paying more than just the minimum amount due; in some cases they may require a certain percentage like 10% and if not possible then at least pay 100%. You should also consider consolidating all those pesky balances onto one card with an introductory 0% APR balance transfer offer (make sure this doesn't go over 30 months though).

Pay off high-interest debt first - Paying down debt with the highest interest rates, such as purchases and cash advances from credit cards, can help lower what you owe faster by reducing monthly payments on those accounts while boosting your FICO® rating for paying higher balances each month. To pay more than just the minimum payment due every month, make sure that any additional money going towards finances goes directly into long term investments like compound savings bonds which earn interest at about double of what most loans offer today (and are exempt from income tax).

2. Increase your credit card limit

You may be tempted to spend money that you don't have, but if you can resist the temptation and use your credit card wisely then getting a credit limit increase will actually improve your ratio. You'll get an automatic hard inquiry which temporarily drops your score by 5-10 points, but this is all worth it because in the end, with just one extra bump of up to $15k on maximum spending allowance as opposed to only 8k before means that for every dollar spent now there's less chance at maxing out past 25% utilization rate.

3. Keep cards open after paying them off

Keeping an account open can be a wise move for several reasons. First, you may want to keep it in your wallet as a form of security against getting into debt again and then having no way to pay the bills or for other necessities like groceries. Second, if you close out the account that has been paid off but is still bearing interest on outstanding balances (credit cards typically charge between 12% - 17%), this will negatively impact your Credit Utilization Ratio which could greatly affect both your score and what type of rates others offer when lending money such as mortgages or car loans.

4. Set up balance alerts

Credit Utilization is a factor of your credit score. One way is with balance alerts, which notify you when it reaches a certain percentage. Set up a monthly alert and stay informed about how much money goes through your card each month- giving yourself peace of mind and improving your score.

If you have any question about the Credit Utilization Ratio, give the credit specialists at CreditRepairEase a call on (888) 803-7889. For more than 7+ years, CreditRepairEase has helped clients work towards fair and accurate credit scores by leveraging their rights.