What is a Credit Utilization Score?

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What Is a Credit Utilization Score?

A credit utilization score measures how much credit you currently use across revolving credit accounts divided by how much credit you have available. Credit cards are a common example of revolving credit, and another way to look at credit utilization is how much of a balance you have on your credit cards divided by the limits that are open to you. Other names for a credit utilization score include a credit utilization rate or credit utilization ratio.

These scores are typically represented using a percentage. For instance, assume an example of you having two credit cards. If the two add up to $10,000 in available credit, but you also have a total balance of $5,000, then you have a credit utilization score of 50%. That’s because you’re using half of the total credit available to you. Credit utilization rates are something you can calculate for your total financial picture or on a per-card ratio for each individual credit account.

If you use less of the credit available to you, then you will have a low credit utilization score. Consequently, you look better to credit scoring models. They assume you’re adept at controlling spending and managing your credit. When you are rewarded with higher credit scores, you have an easier time getting more credit. You can use that credit to finance a home or car, get a credit card with better terms than you might have now, or help finance a business venture.

How Does Your Credit Utilization Ratio Impact Your Credit Score?

Most credit scoring models rely on your credit utilization score as a substantial factor in determining your overall score. In fact, it’s frequently the second-most crucial factor. The most important is your personal payment history, but that can also factor heavily into your credit utilization rate.

Why Does Your Credit Utilization Score Matter?

Lenders and those who provide credit want to know about your credit utilization score for several reasons. First, they want to see how adept you are at managing any current debt you already have before they possibly provide you with more. Second, they can estimate the likelihood of you repaying more borrowed funds to them in the future.

Consider an example of you having multiple credit cards, some of which are maxed out to the point of having no available credit remaining. Lenders might see this as you being likely to overspend and potentially unreliable in terms of repayment. If they were to extend more credit to you, they would be risking loss. On the other hand, a low credit utilization score might demonstrate your ability to repay anything you borrow. It can indicate that you’re able to take more debt on while still being able to maintain your monthly payments.

What Is a Credit Score?

Your credit score is a score generated after an analysis of your credit file. They are usually three-digit numbers ranging from a low of 300 to a high of 850. These scores tell lenders how big of a credit risk you might be. Credit file analysis includes various factors, such as length of credit history and payment history for both current and previous credit accounts.

Credit scores can vary based on who pulls the score and what model they use. The three primary credit bureaus include Equifax, Experian, and TransUnion, and the two major models used are VantageScore and FICO. Over 90% of lenders use FICO scores for their lending decisions. Common categories for FICO ratings include:

  • Very Poor: 300-579
  • Fair: 580-669
  • Good: 670-739
  • Very Good: 740-799
  • Exceptional: 800-850

Five different factors play into FICO score calculations:

  • Amounts owed
  • Credit history length
  • Types of credit used
  • New credit applications
  • Payment history

What Is a Good Credit Utilization Score

In terms of credit utilization, getting closer to zero is better for your overall credit score. Generally speaking, getting to 30% or lower should keep your credit score healthy. However, you should also know that this is a target zone rather than a hard finish line. 

Interestingly, it’s possible to go too far in some cases. Attaining a credit utilization score of 0% might not be ideal. When you’re not using credit regularly, lenders might not have data available to suggest you know how to manage credit on a long-term basis. The most effective strategy might be charging small amounts before paying them in full every month.

Payment dates can impact that, however. Your payment due dates aren’t likely to be the same day of the month that your balances are reported to credit bureaus. If you max out a credit card in the middle of the month, then it’s possible that your credit utilization score goes high enough to reflect poorly on your spending habits. That can happen even if you pay off your balance the following week. Fortunately, you can contact your credit card company and ask them when your balances are reported to credit bureaus so that you can avoid this misleading situation.

Also, keep in mind that overall credit utilization isn’t the only important factor in play. You also need to consider your per-card utilization score. Assume an example of two credit cards. Your first credit card has a credit limit of $2,000 but a $1,000 balance, and your second card has a credit limit of $4,000 but only a $400 balance. Your overall credit utilization of $1,400/$6,000 is 24%, but you’d actually be penalized worse than that. The per-card utilization score of 50% on the first card hurts you specifically despite the better overall number.

How Do You Calculate Your Credit Utilization Score?

In order to calculate your credit utilization score, you need to follow these steps:

  • Add up the total balances of every credit card you have.
  • Add up all the respective credit limits.
  • Divide your total balance by the overall credit limit.
  • Multiply that number by 100 to create your percentage.

Using an online credit utilization score calculator simplifies the math and improves your accuracy. You can also just look it up as part of your credit report. You can usually only get the report for free once a year. The credit utilization score itself is updated monthly.

How Can You Lower Your Credit Utilization Score?

Your credit utilization score is simply money you borrowed divided by your available limit. As a result, there are two primary ways to address it. The first is increasing your credit limit, and the second is lowering your debt. The following are a handful of tactics you can try in doing one or both.

Activate Credit Card Balance Notifications

Many credit cards now have options for alerts that you can set up for your account online. Your balance amount is one of them, and you might choose text messages, emails, or just website alerts. If you want to create a layer of protection for your credit ratio, create a notification for situations where your balance hits 25% of your credit limit. That number leaves you some breathing room to operate while still remaining below 30%.

Keep Using Older Credit Cards a Little

Improving your credit over time can mean taking advantage of better credit terms, and those might include balance transfers, better interest rates, or perks such as travel and reward points. However, that doesn’t mean you should cancel older cards. Lowering your total credit availability puts negative pressure on your credit utilization score. Also, you might lower your credit score by shortening your average credit length. Use older cards sparingly every few months to prevent issuers from canceling inactive accounts.

Pay Your Credit Cards Multiple Times Each Month

You might be in the habit of paying your credit card bill once a month at the assigned deadline. However, paying twice each month or even more frequently might be a good idea. Credit card issuers regularly report the balances to the major credit bureaus, and that information typically comes straight from your account statements. Even people who pay off the whole bill every month but carry high-percentage balances might hurt their credit score. Try paying twice a month or just when your balance gets to 30% of your available limit. Automated payments make this technique very easy to accomplish.

Inquire About a Higher Limit

One thing that might help your credit score is just asking credit card issuers for higher credit limits. All you need to do is call a representative at the phone number on your card, or you can visit their website to chat with an agent. Just be mindful of the factors involved with this. Any request of this nature will trigger a hard credit check, and that inquiry might reduce your credit score by five to 10 points for the next year. Also, if your credit has soured since you opened the card, the inquiry might actually wind up reducing your limit.

Spread Your Purchases Out

You probably have one or two cards you like to use on a regular basis. However, spreading transactions out over more than one card helps your credit utilization ratio when you do lots of credit card spending in a particular month. This helps minimize your individual per-card ratios from hurting you even when your overall credit utilization score is good.

How Does Opening a Credit Card Change a Credit Utilization Rate?

Opening a new credit card should theoretically improve your credit utilization rate; your available credit would go up, and your total balance would not. However, it can actually hurt you. Most credit scoring models factor in how many times creditors look at your report in a particular span of time. Excessive inquiries that happen closely together can hurt your credit score. Also, having a lot of credit cards can skew your overall credit mix. 

Get Help Improving Your Credit Utilization Score

Getting your credit utilization score to 30% or even lower can help raise your credit score. As a result, you’ll enjoy more opportunities for a better financial future. If you’re interested in credit card consolidation through a personal loan, then American Business Credit can help you out. We offer a friendly application process and convenient interest rates. To find out more about what we can do for you, contact American Business Credit right away.

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