Did you know that 30% of your credit score depends on credit utilization?
After making payments on time, credit utilization is one of the most important factors credit bureaus look at when calculating your credit score. The lower your credit utilization, the better. The good news is that it could be something you could improve pretty easily.
What is “Credit Utilization” anyway?
You can figure out your credit card utilization by dividing your total credit card balances by your total credit card limits. (For your total credit utilization, just add up all your cards and lines of credit, including home equity lines of credit, and divide them by your total credit limit.)
Sorry if we’re causing you flashbacks to high school math class! Let’s try an example to make it real. If the balance on your credit card is $500 and your credit limit is $1,000, then your credit utilization for that credit card is 50%.
Why does Equifax care about my credit utilization?
Carrying large balances suggests you’re not able to pay them off in full, which makes it more likely that you might have problems paying your bills in future.
To take it a step further – if you’re relying on your credit to cover your regular expenses, once your credit cards are maxed out and the lines of credit are used up, you may not be able to cover your payments.
What’s considered “good” credit utilization?
Equifax recommends that you keep your credit utilization below 75%. if you’re above 75%, you’re probably setting off some red flags for potential lenders who may be worried that you’re using up too much of the credit you have available to you.
Okay, but good’s not good enough for me. What’s considered “great” credit utilization?
If you are utilizing 20-30% of your credit limit at a time, you’re doing great! Some studies have shown a pretty strong relationship between low credit utilization and high credit scores, with the highest credit scores having 20-30% utilization.
So what can I do to improve my credit utilization and my credit score?
Simple. Pay down your credit card balance, and if possible, pay off the entire thing.
How? Get a loan. I know it’s weird. But a loan doesn’t count against your credit utilization, because you’re approved for a set amount and then you pay it off over time, like a mortgage. You can’t run it up, only down.
Of course, we’d be remiss if we didn’t suggest you check your rate on a loan from Borrowell. You can get a quote in one minute and it doesn’t affect your credit score. And as a bonus, you’ll likely pay less than the 20-30% interest your credit card is probably charging you if you don’t pay off your balance in full every month.
Bottom line: lower credit utilization = increased credit score.
As for this week’s action-plan to increase your credit score, we know just what to do.
1) Pay off your credit cards and lines of credit. Get a fixed-term loan (that probably charges a lower interest rate) and use those funds to pay off your credit card. Whether you get a loan online from Borrowell or get thyself to a bank branch, pay that baby off. You’ll pay less interest AND see your credit score go up.
2) Call your credit card company and ask them increase your credit limit. Alternatively, you could apply for another credit card. Please do this responsibly!! We’re not trying to increase your debt load, just improve your credit utilization.
As we come to the end of week three (almost halfway there everyone!), we’ll leave you with this thought:
Carry small balances that you are able to pay off every month. This will demonstrate your financial responsibility, and in turn, boost your credit score. Because you can and will increase your credit score. We have a (really) good feeling about this one.
Next week we will learn about length of credit history, and how that can impact your credit score. Have a great week!