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How Much Does Credit Utilization Affect My Credit Score?

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Revolving credit can provide you with easy and convenient access to funding when it’s needed. But it’s helpful to know that utilizing too much of your credit availability could adversely affect your credit score (also called your FICO Score). Let’s explore what your credit utilization ratio is and how it can be used to improve your credit rating.


What is credit utilization?


Your credit utilization is how much of your available credit is being drawn. While you’re allowed to borrow up to the limit provided by the lender or credit card issuer, this may not be a good idea because they may perceive you as a risky borrower. FICO will consider this by calculating what’s called your credit utilization ratio.


How your credit utilization ratio works


Your credit utilization ratio is defined as the sum of all the credit you’ve drawn divided by your total available credit. For example, let’s say your available credit is $10,000. For this billing cycle, you made $3,000 in charges. So, your credit utilization ratio will be $3,000 divided by $10,000 for a ratio of 30 percent.


It’s generally recommended by many credit and financial experts that your credit utilization ratio should not exceed 30 percent. Note that your credit utilization ratio is only calculated at the end of every billing cycle when the lender reports your balance to the three major credit bureaus: Experian, Equifax, and TransUnion.


How much does my credit utilization affect my credit score?


According to FICO, your credit utilization ratio can account for up to 30 percent of your credit score. This factor is weighed more heavily than others, such as length of credit history (15 percent), maintaining a credit mix (10 percent), and how many new credit inquiries you’ve had over the past year (10 percent). However, maintaining a timely payment history still counts for more (35 percent).


How you can maintain a good credit utilization ratio


If you’d like to keep your credit usage in check, here are some good tips to follow:


  • Use your credit moderately. Even though you shouldn’t use over 30 percent of your available credit, it would be ideal if you could keep it within the 10 to 20 percent range.
  • Don’t avoid using credit. Even though maintaining a low credit utilization ratio is desirable, you don’t want it to be zero. Lenders need to know that you can use credit, even if it’s just a little bit, and pay it back responsibly.
  • Increase your total available credit. An easy way to lower your credit utilization ratio is to open additional cards. For example, if you have two credit cards that each have a $10,000 credit limit, then making $3,000 in purchases will now only be a credit utilization ratio of 15 percent.
  • Don’t carry a balance. Revolving balances also count towards your credit utilization. So, try to pay your credit card bill in full whenever possible. This is also a great way to avoid unnecessary interest charges.


The bottom line


Your credit utilization ratio is the sum of how much credit you’ve used during a billing cycle divided by your total available credit lines. FICO scores tend to be negatively impacted by credit utilization of 30 percent or greater. Keep yours in check by using your credit cards responsibly and increasing your credit limit.

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