What Does Credit Utilization Mean for Your Credit Score?

Lending institutions rely upon credit reports to help determine the likelihood of a borrower repaying a loan. The information upon which these reports are comprised is supplied to reporting firms by other lenders.

Rating factors include your payment habits and the length of your credit history. The types of credit you have, how much new credit you have, and how much total debt you have balanced against what’s available to you are also considered. This last factor is known as your credit utilization.

Here’s what it means for your credit score.

Calculating Credit Utilization

Essentially, this is the ratio of your outstanding credit card balances against the limits applied to them. Credit utilization comprises a full 30 percent of your overall score, making it a significant factor. To find your utilization ratio, divide the total dollar amount of your credit card balances by the total of your credit limits and multiply the quotient by 100.

To make the math easy, let’s say you have a credit limit of $1,000 and an outstanding balance of $300.

300 / 1000 = .3

.3 x 100 = 30 percent

Most experts consider a utilization ratio of 30 percent or less desirable.

Tips for Keeping Your Ratio Low

As always, the smartest play is to pay your balances off in full each month. In other words, avoid charging more than you can pay off before each billing cycle’s grace period ends.

Another strategy is to find out when your balances are reported to the credit bureaus and make sure your accounts are paid down as much as possible before that date each month. This will at least keep you in the ballpark, if not exactly hitting home runs.

Asking for a limit increase will help as well. Remember, the utilization ratio is the outstanding balance weighed against available credit. The higher your limit, the lower your utilization ratio — assuming you don’t take the higher limit as license to charge more.

Making double payments each month instead of a single one can also keep your overall utilization ratio low.

What to Do If Your Ratio Is High

Sometimes, the tips above can’t be applied because outstanding balances are simply too high. If this is true for you and you’re having trouble meeting the minimum payments on your accounts, consult the services of a debt specialist. These professionals can help you devise a strategy to get your finances back in order.

Before you choose one with which to work, do some research to ensure you hire a reputable firm. Information like these Freedom Debt Relief reviews can help you determine just how effective a company is in this regard.

Why It Matters

Again, the primary purpose of a credit score is to serve as an indicator of how likely you are to repay a loan. A high credit utilization ratio can be worrisome for credit card issuers as it’s an indicator you might be overextended and in danger of falling behind on your payments.

Conversely, the lower your utilization ratio, the higher your overall credit score will be. High credit scores mean easier qualifying and more favorable interest rates for loans. They also come into play when you’re looking for an apartment and applying for a job. Understanding what credit utilization means for your credit score will help you lead a stress free financial life.