Why does it impact my credit score?
The utilization rate is an important indicator of lending risk. A person who constantly charges all of the money they can (their credit limit) is far more likely to suddenly have difficulty repaying that money than a person who uses their credit cards sparingly.
How does it impact my credit score?
As there are dozens of different credit scoring models, it's difficult to calculate exactly how credit utilization will impact your credit score. However, there is a strong correlation between a consumer's credit card utilization rate and their credit score. With the exception of consumers who keep their credit card utilization at 0 percent, those who keep their utilization percentage low on average have higher scores than those who constantly max out their credit cards.
Although it is an important factor in calculating your credit score, it is important to remember not to just focus on this one aspect of your credit score. Keep the big picture in mind.
In addition, it's important to note that high credit utilization on a single credit card will negatively affect a consumer with little credit history and only one card far more than it will someone with multiple cards and a long and excellent credit history.
How can I lower my credit utilization?
There are three easy ways to lower your credit utilization. The easiest way is to make credit card payments more than once a month so that your balance never gets too high. If you have more than one credit card, another good way to lower your utilization is to use multiple cards each month. This will result in various cards with low credit utilization rather than one with high utilization. Lastly, you can try to increase your available credit. If your income has increased, if you've maintained an amazing credit history, or if you have little debt, it doesn't hurt to ask for a credit limit increase. Just remember that this can sometimes result in a hard inquiry on your credit. If you lack excellent credit, try opening a secured credit card and adding to its security deposit over time.
- You do NOT have to carry a credit card balance or pay interest every month to show credit card utilization. Even if you pay your credit card balances in full every month, simply using your card is enough to show activity.
- Experts recommend keeping your credit card utilization below 30 percent on each card and collectively. This shows lenders and credit scorers that you know how to spend responsibly and will help your credit score. However, creditors also care about the total dollar amount of your available credit, so if you have a low credit limit, don't worry if your credit card utilization rate is slightly higher than recommended.
- Although high credit utilization can be detrimental to credit scores, keeping credit utilization at 0 percent is not recommended either. Creditors want to see people who use their credit, but are able to manage it responsibly.