There are many factors that influence your credit score which can positively or negatively impact your ability to attain fair and affordable financing.
While your payment record may be stellar, your credit card utilization is also factored in and represents approximately 30% of your credit score calculation.
If your utilization is low, it can help your score but if it’s very high it 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
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.
Credit Reporting Agencies pay close attention to your 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.
So What’s Considered “Good” Credit Card Utilization?
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
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.