If you’re working towards improving your credit score, you likely have a variety of questions about the things that you do to improve it, and how different financial moves affect your score. But calculating credit scores is a bit of science. There is no set number of points that your score will rise or drop when you miss a payment or pay off a credit card. Instead, different credit factors impact a percentage of your total score.
One factor is your credit utilization. How much does credit utilization affect my score? Keep reading to find out.
What is a Credit Utilization Rate?
Before we can answer the question of how much credit utilization affects your score, it’s important to understand what your credit utilization rate actually is.
All credit card holders have a set credit line available to them. If you have multiple credit cards, you have multiple lines of credit. How much your line of credit is worth depends on a variety of factors. This includes the type of card you apply for and how much the credit card company chooses to lend you.
Your credit utilization rate, also known as a credit utilization ratio, is the ratio of your total credit line available versus how much of that credit line you’re using.
Credit utilization rates are based only on revolving credit. This means that only credit cards and lines of credit are considered, not installment loans, such as your mortgage or a car loan. These do affect your credit score in other ways, but do not affect your credit utilization rates.
How is Utilization Calculated?
To figure out your credit utilization rate, you need to calculate the percentage of the total available credit line amount you’re currently using. For instance, if you had five credit cards with a combined credit line of $12,000, and you have currently charged $6,000 on those cards, your credit utilization rate would be 50%. If you spent another $3,000, for a total of $9,000 charged on your cards, your credit utilization rate would now be 75%.
Your credit utilization rate can also be factored in for each individual credit card you hold, also called your per-card ratio. However, because your total credit card debt is considered when calculating your credit score, it’s best to calculate your total credit utilization rate rather than your per-card ratio.
What Does ‘Credit Limit’ mean?
Another term that you might see when researching your credit utilization rate is “credit limit.” This refers to the total amount of your line of credit on your credit cards. For instance, if you have a credit line of $2,000, your credit limit is $2,000.
As you pay down your credit cards and your total credit usage drops, your credit utilization rate will decrease as well. Your credit utilization rate will also change if one or more of your credit card companies decide to raise or lower your credit limit. Your line of credit may be reduced if you miss one or more payments. You can request an increase, which may be approved if you’ve made timely payments for an extended period.
How Much Does Credit Utilization Affect Your Score?
Like the age of your oldest credit account and how many late payments you’ve had in the past, your credit utilization rate is one of the factors that go into determining your credit score. How much does it affect it? This depends on the scoring model being used. Each credit bureau uses a different credit scoring system to determine their scores.
However, the credit scoring models used by the top three credit bureaus are similar. For each of these models, your credit utilization rate accounts can impact up to 30% of your credit score. This makes it one of the most influential factors to go into determining your credit score.
What is a Good Credit Utilization Rate?
Different credit reporting bureaus weigh your credit utilization rate differently. This means it can be tough to nail down exactly how much is too much debt to have at one time. Of course, having no debt or less debt is always the best answer.
However, when it comes to managing your credit utilization rate so that it won’t drag your credit score down, the 30 Rule of Credit Utilization is the best answer.
The 30 Rule of Credit Utilization
The 30 Rule of Credit Utilization states that, in general, it’s best to keep your credit utilization rate below 30%. This means that you should be using 30% or less of the total credit that you have available through all of your credit cards and any lines of credit you may have.
Using more than 30% of your total credit available can impact your credit score and cause it to drop.
This doesn’t mean that you need to use less than 30% of your available credit on each card. You could use a higher percentage of one card, and a lower percentage of another. Just as long as your total credit utilization rate is below 30%.
If you’re working on lowering your debt, this means that you can use the snowball or avalanche method, where you pay down one card at a time. As you pay down one card, you free up money that you were using to make your monthly minimum payments. You can then use this additional money to start paying down another card. Continue the process until you’ve paid down or paid off all of your credit cards and lines of credit.
Is it bad to have 0 credit utilization?
You already know that paying down large amounts of debt can help you to improve your credit score. But is it bad to have 0 credit utilization? The answer may surprise you.
The credit bureaus don’t specifically state that having no debt will lower your score. But we do know that they place value on healthy credit card usage. This means using your credit cards and then paying off your balance on time. In order to get those timely, regular payments and build credit, you must use your cards.
If you’ve paid off all of your credit card debt, experts recommend aiming for using 1% of your available credit rather than 0.
Using a Healthy Credit Utilization Rate to Raise Your Credit Score
Along with on-time payments and other smart financial moves, having a healthy credit utilization rate can help you build a stronger credit score. If you’re struggling with a low score, focus on paying down your debts. Lowering your credit utilization rate may be just what you need to do to see that score drop.
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