The Most Important Factor in Your Credit Report

Your credit utilization ratio compares your credit card balances to your credit limits. In other words, it's how much you're currently borrowing compared to how much you could borrow.

The credit utilization ratio compares a person’s credit card debt to their total credit card limits. Credit utilization accounts for roughly 30% of your credit score, making it one of the most crucial factors in your credit report. Generally, a lower credit utilization is better. However, anything below 30% is considered “good,” and a 0% ratio may not necessarily be the best.

You can improve your credit utilization ratio by reducing your credit card debt or by increasing your credit limit.

How Do You Calculate the Credit Utilization Ratio?

To calculate your credit utilization, divide your credit card balance by your credit card limit. You can easily obtain this information from your most recent credit card statement, by logging into your online account, or by contacting your credit card company.

How the Credit Utilization Ratio Works

Credit utilization is a flexible number that changes based on your credit card balances and credit limits. It’s important to maintain a good credit utilization if you want to build and keep a good credit score. When your credit utilization increases, your credit score can decrease. High credit utilization suggests that you might be spending a significant portion of your monthly income on debt payments, which increases the risk of not being able to make payments in the eyes of creditors.

If your credit utilization ratio is too high, your credit card and loan applications could be denied. Even if you are approved, you may have to pay higher interest rates or make a larger down payment than if you had a good credit utilization ratio. Even if you pay off your credit cards quickly, your credit report probably won’t reflect a zero balance immediately. However, the balance and credit limit information are typically updated within 30 to 45 days. This means that your score can improve as quickly as it decreases. It’s sometimes better to have some activity on your account, as a 1% credit utilization ratio can look better than 0% in some cases.

While one rule of thumb is to keep your credit utilization ratio below 30%, experts suggest that the lower the better.

Reducing Your Credit Utilization Ratio

Remember, you have the power to reduce your credit utilization, which can positively impact your credit report and score. There are two main ways to improve your credit utilization:

⦁ Lower Your Credit Card Balances: You can lower your credit card balances by making extra payments. Keep in mind that your credit card issuer may only report your balance at the end of your billing cycle, so it’s important to keep your balance low during that time. If you’re unable to pay off the balance right away, try to avoid making new credit card purchases and pay down your balance gradually over time.

⦁ Increase Your Credit Limit: Another option is to ask your credit card issuer to increase your credit limit. However, this may not be easy, as the issuer will consider factors such as your income, credit history, and time since your last credit limit increase. If your credit utilization is already high, your issuer may hesitate to extend you more credit.

It’s worth noting that opening a new credit card could potentially lower your overall credit utilization. However, keep in mind that applying for a new credit card will result in a hard pull on your credit, which could hurt your score and offset the benefits of reducing your credit utilization. Expanding an existing credit account is generally better as this won’t involve a hard credit check.

Limitations of the Credit Utilization Ratio

While your credit utilization ratio fluctuates, your credit score does not reflect every fluctuation. Your credit score is calculated using the credit utilization information available on your credit report at that point in time, which may differ from your current account balance. Your credit report isn’t updated daily, so if you’ve recently paid off a big chunk of your debt or made a big purchase, that might not be reflected in your credit score immediately.

Tips to Manage Your Credit Utilization Percentage

Several steps can be taken to manage your credit utilization, especially if your credit cards are used frequently each month.

⦁ Set up balance alerts to notify you if your balance exceeds a certain preset limit.

⦁ Spread out your charges over different cards to keep lower balances on several cards instead of a high balance on one card.

⦁ Time your payments right by paying attention to the date you make your card payments each month. Ensure your balance is low by your account statement closing date.

⦁ Consider asking your creditor to increase your card limit, especially if you have had a change in income. This can lower your overall credit utilization and positively impact your credit score.

⦁ Pay your credit cards twice each month to keep your utilization low. This can help ensure that your balance stays below the 30% threshold.

Remember that a high credit utilization doesn’t have to hurt your credit score forever. By reducing your credit card balances or increasing your credit limits, you can decrease your credit utilization and improve your credit score. Keep in mind that some credit scoring models may consider overall credit usage as well, so it’s important to manage your credit responsibly.