What Is Credit Utilization & How Does It Impact Credit Score?
Credit utilization is a major factor that impacts your credit score. While most of us have heard the term, “credit utilization,” many of us do not fully understand what this term means and how big of a role it plays in determining your score. This article will answer the top questions surrounding credit utilization, including:
- What is credit utilization?
- How is credit utilization calculated?
- How does credit utilization impact credit scores?
- How can I improve my credit utilization?
Top Questions About Credit Utilization
Question 1: What Is Credit Utilization?
Answer: Credit utilization is the ratio between the balance across all of your credit accounts and your total credit limit across all of your accounts. This ratio displays to lenders how much of your total available credit you are using.
Question 2: How Is Credit Utilization Calculated?
Answer: To calculate your credit utilization, you need to know your credit limit and current balance of every credit account you have. After you have this information, you must add up the credit limits across all of your cards, and then separately add up all of the balances. Once you have your total limit and total balance, you divide your total balance by your total credit limit and multiply by 100 to get a percentage.
Credit Utilization Formula
Credit Utilization= Total Balance/Total Credit Limit x 100
Below is an example to increase your understanding.
Calculation: $11,000/$26,000=.42 x 100 = 42%
In this scenario, your credit card utilization would be 42%. While this isn’t a horrible ratio, we recommend you try to keep your credit card utilization at or below 30%. When it comes to credit card utilization, the lower the percentage the better.
Question 3: How Does Credit Utilization Impact My Credit Score?
Answer: There are five elements that make up your credit score:
- Payment History (35%)
- Credit Utilization (30%)
- Length of Credit History (15%)
- Types of Credit (10%)
- New Credit (10%)
As you can see, credit utilization is the second largest contributing factor to your credit score. Why is this so? If you are maxing out your credit lines, it’s a good indication to lenders that you are spending beyond your means, and they will therefore put you in a higher risk category. On the contrary, if you have a lower credit utilization ratio, lenders will assume you have your spending under control, and thus pose less of a financial risk.
Question 4: How Can I Improve My Credit Utilization
Answer: The below tips will help you lower your credit utilization ratio.
- Make Multiple Payments: Something most consumers don’t know is that credit card issuers only report balances to the credit bureaus once a month. Thus, if you normally pay your balance off in full, but your credit card issuer submits the data before the end of the billing cycle, it could appear as though you always have a large balance on your card. Making multiple payments throughout the billing cycle can help you avoid this.
- Avoid Closing Credit Cards: It’s tempting to close credit accounts that you no longer use; however, doing so could have a negative impact on your credit utilization and credit score. Closing unused accounts will lower your available credit, and thus increase your utilization ratio. Unless a card has an annual fee, we suggest leaving it open to avoid increasing your credit utilization.
- Request A Limit Increase: Requesting a limit increase from your credit card issuer could help to improve your credit utilization ratio by increasing your total limit. By increasing your total limit, you can decrease your utilization as long as you do not go out and spend more. You should only request a limit increase if you are able to keep your spending under control.
- Set Up Balance Alerts: An excellent way to keep track of your spending is to set up balance alerts via text message or email to alert you when your spending has reached a certain level. Often times, you can request to be notified when your balance reaches a certain percentage of your available credit.
For some additional tips on how to improve your credit utilization, check out this article by Nerd Wallet!
After reading this article you should have a solid understanding of how much credit utilization can impact your credit score. As a rule of thumb, you should aim to keep your credit utilization as low as possible if you are serious about credit repair. We understand life happens. There will be instances where you are required to spend more than you would like. If you are facing a major financial expense, consider applying for a personal loan rather than swiping your credit card. Personal loans often have lower interest rates, and are not viewed as a revolving credit. For additional tips on credit and lending view the Launch FCU Blog.
- 5 Tips on How You Can Be #CyberAware
- 7 Tips For Donating to a Charity
- 8 Tips for Creating Account Passwords
- 5 Tips to Prepare for a Hurricane
- 6 Tips for Back to School
- Should You Buy A New Or Old Home?
- Will Refinancing Your Auto Loan Hurt Your Credit Score?
- How To Do Valentine’s Day On A Budget
- Top 5 Ways To Save For A Car
- 10 Ways To Improve Your Finances In 2019
- 4 Best Ways To Budget For A Baby
- How To Overcome Impulse Purchases
- What Items Should You Inspect When Buying A House?
- How To Save Money On Holiday Shopping In 2019
- Four Ways A Personal Loan Can Help You Through A Difficult Time
- What Is Credit Utilization & How Does It Impact Credit Score?
- Why You Should Consider Refinancing Your Car Loan
- 5 Boat Buying Tips For A First Time Buyer
- Top 8 First Time RV Buyer Mistakes To Avoid
- 4 Tips To Help You Save Money This Halloween
- September 2019
- August 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015