Credit Card Utilization Rates and Your Credit Score
The algorithms used to calculate your credit score contain complex numerical models. We believe in keeping things simple for our readers, which will help you understand important financial concepts essential to understanding a credit score. With this in mind, you should understand credit card utilization rates, an important factor used to calculate your score.
Calculating Utilization Rates
If you’re confused by the words “credit card utilization rates,” – you’re not alone. Many people do not understand the definition of this term, or how it affects their credit. All you need to know is that it is a fancy term for the amount you have spent on your card in relation to its limit. To calculate this rate, simply compare your total amount spent against the limit; this will give you the utilization rate.
The Rate’s Impact
The equation is, once again, very simple: the lower the rate, the lesser the impact on your credit score. Just knowing this is not enough; we want you to understand why this is the case.
Since the credit card utilization rate is an indicator of usage, the more you spend, the more it will affect your FICO score. It all depends on your card’s limit, and if you are able to pay the bills on time. You can use your credit card regularly and it can still have only a minimal impact on the score, provided you clear your dues in time. If that is not the case, then the rate suggests that you are at a higher risk of borrowing more credit without any assurance of paying it back. This is one thing that sets the alarm bells ringing for lenders.
Tips and Tricks
There are ways to manage your utilization rate. We offer you some of the easy tips and techniques:
- If you have a high balance-to-limit ratio (or a high utilization rate), you can reduce the negative impact by using your card for smaller expenditures.
- The number to aim for is 30%. Try and keep your utilization rate around or lower than this percentage, and your FICO score will not be affected.
- Another number to aim for is 20% — the ideal percentage. The reason being is that it shows you know how to use your credit and manage it wisely without harming your financial health.
- If you have a high utilization rate, you can still have a good FICO score, provided the other factors remain positive.
Credit card usage is unavoidably tied to your credit score. In order to maintain a good credit score, it’s necessary to responsibly manage your credit card spending and payments.
Are you curious about your credit card information in relation to your credit score? At Action Credit Repair, our experts will provide a personalized credit consultation, an audit of your credit history, and offer solutions to all of your credit obstacles. Contact us today to speak with an experienced professional: Call 518-945-2299 or email [email protected].