If you are eager to boost your credit score, you’ve probably heard of the expression “credit utilization” or the credit utilization ratio. Sure, we all know it’s one of the important aspects that affect your credit score, but how much credit utilization is good?
Well, if you plan on maintaining a high FICO score, your credit utilization shouldn’t be above 30%. That number refers to the amount of total revolving credit you are using vs the overall amount you have available, and although it sounds intimidating, let us guide you through it, so you can optimize your credit usage to the max!
About Credit Utilization Ratio
To put it simply, the credit utilization rate is a sign of your financial wellbeing. For instance, if you only use 10% of your total available credit, you are at less risk in case of unexpected expenses than someone that uses 30% or more.
In other words, if your total credit card limits are $10,000 on all your credit cards, your score will be higher if you only use about $1000 at any given moment. So, how can you keep the utilization rate good without sacrificing your normal expenditures?
If you make new credit card purchases that exceed 30% of your credit utilization, you should make the effort to pay the balance as soon as possible, so it won’t damage your credit score.
What’s The Optimal Credit Utilization Ratio?
In the US, a utilization ratio above 30% is considered high credit utilization. It means that you are using more than $3000 in the previous example where your credit limits are $10,000 in total.
According to Experian’s research on credit utilization, it’s best to keep your ratio below 10% and this can lead to your score being as high as a FICO 800! However, don’t you think it’s a bit demanding to keep the credit usage so low, especially when you have a much higher limit?
Many consumers, myself included, find that you can’t simply cover all of the monthly expenses while keeping such a low utilization ratio, not to mention unexpected expenses that might occur at any point.
An optimized credit utilization ratio is always the best option – that way you can spend some money while keeping the rate optimal without any restrictions. How can you do it, you may ask?
Luckily, there are several things you should know about how the credit utilization ratio is calculated, so you can figure out how to best spend your money responsibly!
Calculating The Utilization Rate
Here’s the first thing you should be aware of regarding credit utilization – credit bureaus calculate your credit utilization at a specific point in time.
So, let’s say that you’ve just made a big purchase on one of your cards.
Logically, that will raise your utilization ratio, since you are using more of your credit. But, credit bureaus might not measure your ratio at this point in time as usually it only gets reported by the credit card issuer after your billing cycle ends.
Don’t worry in such scenarios – the only thing that matters is that you can pay down the balance without much delay.
Ideally, to maximize your time to pay back the debt before it gets reported you’d want to make the purchase right after your statement from the previous month closes. This way you should have roughly 30 days before the next statement close to start making repayments on any purchases.
The more you can pay down the balance before the next cycle starts the better off you will be from a credit utilization standpoint.
How To Keep Your Credit Utilization Rate Low?
Now that you have a better understanding of acceptable credit card debt and low utilization, it’s time to bring some tips to the table! Here’s how you can keep your debt-to-credit ratio as low as possible, without restricting yourself financially:
- Use more than one credit card
- Consider extending your line of credit
- Ensure credit diversity through old credit accounts
- Make frequent debt payments
Using More Cards Benefits Your Score In More Ways Than One
Using a single credit card simply won’t work if you wish to keep your credit utilization low. Especially if you plan on making a big purchase, it may be for the best if you used multiple cards to pay for it.
Although your credit utilization is mostly calculated over your entire credit limit, the bureaus will also consider reports from individual cards. So, not only do you lower individual expenses by applying for a new credit card or using more cards for a single expense, but you also improve your total line of credit.
This shows lenders that you can manage several credit accounts easily, and your overall credit utilization won’t have the burden of the total balance being charged on just one card.
Don’t Hesitate To Ask For A Credit Limit Increase
To keep your credit card balances optimal, you can approach the credit card issuer and ask for higher credit limits. However, I wouldn’t advise this move to consumers that aren’t good with financial planning.
Sure, getting a credit limit increase can benefit your utilization, but it might also entice you to spend more than you can afford. Still, it’s easy to see how extending your available credit benefits your low credit utilization rate.
If you had a limit of $10,000 and spent more than $3000, you’ll be passing that golden limit of 30%. However, with the credit limit extended to $15,000, you’ll only be spending 20%, so it’s a great move that leads toward keeping a good credit score.
Don’t Close Your Old Credit Accounts
If you have an old credit account that you aren’t using anymore, don’t close it – it might lower your credit utilization. Also, account age is a factor in your credit score, so the older the card/account, the better.
Moreover, it affects your credit history and proves that you can cover your obligations on an old account responsibly. So, making a small purchase every now and then couldn’t hurt, unless you have a large annual fee on that card. If not, keeping it active can result in a significantly lower credit utilization ratio.
Cover Your Debt Weekly
Even if you end up having higher credit card debt due to one large purchase, you can keep your rate low by making frequent payments. This way, you can make it work by paying off the debt, or at least a portion of the debt before the billing cycle ends.
Your credit card balances are reported to bureaus based on these cycles, so you stand a better chance of having a lower total credit card balance in each cycle if you make weekly payments.
How Much Does The Credit Utilization Ratio Affect Credit Scores?
To understand the importance of sorting out your credit card balances and keeping utilization as low as possible, take a look into the factors that affect your FICO rating:
- Credit utilization ratio – 30%
- Payment history – 35%
- Types of credit in a credit mix – 10%
- Credit history length – 15%
- Applying for new credit – 10%
Now you can see that credit utilization and payment history are indicators of your creditworthiness. They also have the highest impact on your credit score, so keeping usage of your revolving credit as low as possible puts you on a good road with most credit scoring models.
The credit utilization ratio is a major factor in proving your creditworthiness to lenders and keeping your rating optimal. Having a high utilization can negatively affect your FICO score, which results in higher interest rates for new credit.
Hopefully, you can use this guide to maintain the best credit utilization ratio and optimize your credit spending habits completely.
Frequently Asked Questions (FAQ):
Is the 1% credit utilization ratio the best?
If you had a 1% credit utilization ratio, it would mean that you aren’t spending any of your revolving credit in particular. It’s ultimately not beneficial for your credit scores, as your history of payments would decrease. Still, it’s nearly impossible to achieve this rate, so you should only focus on keeping your rate between 10% and 20% ideally.
What happens if you have a high credit utilization ratio?
If you are using too much of your available credit, it’s a sign to lenders that you might have difficulties repaying the debt in a timely manner. A consumer that constantly goes over the utilization limits poses a higher risk than someone that’s capable of keeping each credit card account low.
Does applying for more credit lower your credit utilization?
If you apply and get approved for a new credit card, your credit line gets extended overall and that means you can spend a bit more while keeping your utilization low. However, you should handle the credit responsibly without being tempted to change your spending habits, since spending too much can result in high utilization.
Rory AckermanHi, I'm Rory! I've worked in the banking industry for quite some time and wanted to help provide my expertise with all things credit related. In my spare time I like to play video games and collect sports cards.
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