What Is Your Credit Utilization?

Your credit score may feel like an enigma but it is made up of a few major components that are pretty easy to understand. One of these things is your credit utilization.

Credit utilization, along with on-time payments, has an enormous impact on your credit score and even a modest improvement can quickly change your score for the better. If you are ever looking to improve your score this is one area you should focus on.

What Is It?

Credit utilization is exactly what it sounds like. How much of your credit are you actually using? This is also known as a credit utilization ratio. Essentially the percentage or fraction of the available credit you are actually using versus what you have available to you.

Everytime you open a credit card or get a loan you are issued a line of credit. Sometimes you use this entire amount and sometimes you don’t. If you max out your credit card you are using 100 percent of available credit and would have a credit utilization of 100 percent.

Is Lower Better?

The lower your credit utilization the better because the less you owe compared to the amount you have been lent. This mainly applies to your credit cards rather than loans.

Say you have a credit card with a limit of $50,000 and you have used $10,000 -- this means you have a credit utilization of 20 percent. A credit utilization of under 30 percent is what you want to aim for both cumulatively across all of your cards as well as for each card individually.

How Can I Improve Mine?

The best way to improve your credit utilization is to shrink the percentage by paying down your debt. Start with your card with the highest interest rate so you don’t get buried under fees and chip away at it.

Another tactic is to ask for credit line increases to increase the limits on your card. If your limit goes from $20,000 to $30,000 then your utilization instantly decreases despite not making any debt payments. 

You can also do this by opening up another credit card and never using it. But be cautious when going this route and be sure that you will not be tempted to spend because you will only get yourself into more trouble.

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