There are many factors that influence your credit score, all of which can negatively impact your ability to attain fair and affordable financing.

While your payment record may be stellar, your credit card utilization is weighted at approximately 30% when calculating your credit score and can be lowering your score substantially – even with no late payments. So what is credit card utilization? What’s considered a “good score”? Why do reporting agencies care? What can you do about it?

Credit card utilization is the ratio of credit used to credit extended – it is simply calculated by dividing your credit card balance by your credit card limit, and multiplying by 100.

Reporting agencies pay close attention to Credit Card utilization for the following reasons:

  • The more credit you utilize, the higher the risk of default or late payments
  • It may indicate financial instability (Using high amounts of credit to cover cash flow shortage)
  • If you are already using a large percentage of your extended credit, and are seeking more financing – it may appear you cannot pay off your current debt.

In terms of a good score – the answers vary. Some say under 35% is ideal, most advise for 30%, while some experts say to keep it as low as 25%. There is one consensus – that whatever ratio is ideal isn’t an absolute threshold. Your score won’t skyrocket at 31%, nor will it be perfect at 24%. There are lots of factors that are used in a reporting agencies algorithm to increase accurate scoring.

How to lower your credit card utilization? It is fairly simple – start to pay off your balance. In addition, as cards start to become paid off – leave the accounts open. This increases the amount of available credit you have extended that is not in use, which lowers your utilization ratio. A short-term trick some people try is to open new lines of credit to lower their ratio, but this is not advisable due to “hard credit inquiry checks” that will lower your score.

Remember, raising your credit card score is a combination of many factors that require patience – so slowly chip away at it, and you’ll be on your way to a better score.