Credit Utilization: What It Is + What You Need to Know

Credit Utilization: What It Is + What You Need to Know

Once you use credit cards often, like for instance, during a pandemic when you needed more assistance for expenses, you might notice that your credit score may take a hit. At first, it could leave you pondering, but the correlation is fairly common and well-documented. Even though you’re paying your bills in full and you’re not maxing out your limits, using some credit cards for bigger or more purchases can hurt your scores temporarily.

An Overview of Credit Utilization

Credit utilization, also known as credit utilization ratio or credit utilization rate, refers to the relationship between your credit limits and balances on your accounts. The golden rule is that a low utilization rate is ideal for your credit score, while higher rates may reduce your score.

Other than being an essential credit-scoring factor, one of the several aspects of your credit score that you may control and change quickly is your credit utilization rate. When compared to late payments, which may stay on your credit reports for 7 years, you can reduce your utilization rate from a month to the next to provide your scores a boost. That’s all for an overview of credit utilization.

How To Calculate Your Credit Utilization Ratio?

If you like to calculate your credit utilization ratio, try adding up every credit limit on all of your credit cards. If you don’t know your credit limit, you may find them through logging into your credit card account app or portal.

When you’ve finished adding your credit limits, you can start adding up the current credit card balances. Then, divide your debts by credit and multiply them by 100 for you to get your credit percentage using as your credit utilization ratio.

The total credit utilization ratio isn’t the sum of the individual credit utilization ratio of credit cards. The percentages don’t work in that way. That is the reason why it’s crucial to calculate your total credit in comparison to the total debt.

How To Lower Your Credit Utilization Ratio?

It’s easy to lower your credit utilization ratio and it’s also one of the fastest ways to enhance your credit score. Below are some of the ways to lessen your debt, reap the advantages of a low credit utilization ratio, and boost your credit:

Pay Your Balances

A good way to lessen your credit utilization ratio is by paying off the balances on your credit card. Each dollar you pay off lessens your total debt and credit utilization ratio, making it a win-win scenario. Moreover, paying off balances means you don’t need to pay interest on such balances.

Ask For A Credit Increase

Another way to lessen your credit utilization ratio is to request the credit limit increase from credit card issuers. Through boosting your credit limit, you’ll need available credit on your account that would lower your credit utilization ratio. Just make sure that you don’t turn the new credit into another debt.

Your credit utilization is an essential factor when it comes to your credit score, so it’s vital to understand the ways to manage it well. Once you do good credit habits and keep a healthy credit utilization rate, your credit score may stay in a great range and improve over time.