Understanding Your Credit Utilization

There are many factors that go into determining your credit score. One of the biggest factors is your credit utilization.

Your credit utilization ratio makes up about 35 percent of your credit score - one of the biggest factors along with payment history.

Simply put your credit utilization is how much of your credit you are using at any given time. If you have a credit card with a $10,000 limit and you’ve used $5,000 you are using 50 percent of your credit - your credit utilization is 50 percent.

You may be thinking, “I was given a limit, why can I only use a fraction of that without it hurting my credit?” What a credit utilization ratio tells lenders is that you are not spending beyond your means. Even if you make on-time payments 100 percent of the time a high credit utilization will still hurt your score. The more and more someone uses against their limit the more and more likely it will be that they will not be able to pay it back or need more.

Generally, a credit utilization ratio of under 30 percent is ideal. Credit utilization is applied overall to all of your cards and loans but also individually. If you have four cards, three without a balance and one with 60 percent of the available credit used, that may still lower your score a because that individual card will have a higher credit utilization ratio.

There are a few ways to adjust your debt to make your credit utilization better. One way is to focus your payments on the card with the highest balance and pay minimums on the others. If you can chip away at a big balance your credit utilization will fall for that card and overall which will improve your score.

Another way is to, believe it or not, open a new card or get a limit increase. If the amount of credit you are approved to use increases the percentage utilized will fall. This is an option that will work but needs to be done cautiously as adding another card may lower your score depending on your credit history.

Like everything improving your credit utilization ratio depends on the details of your credit history and weighing the risks with the rewards.

We're here to help you rebuild and understand your credit. Give us a call to get started or learn more about what we can do for you 1-800-431-0449.