Using credit – what is your credit card amount relative to your credit limit – plays a major role in your credit score. Making up to 30% of your credit score, using credit is the second biggest factor affecting your credit score, in addition to your payment history.
Good credit utilization is important if you want to build and maintain a good credit score. As credit utilization increases, your credit score may decrease.
High utilization of credit indicates that you are likely to spend a large portion of your monthly income on debt payments, which puts you at greater risk of defaulting on your payments.
High credit utilization can lead to the rejection of your credit cards and loan applications. If you are approved, you may need to pay a higher interest rate or make a larger contribution than if you had good use of the loan.
What is a good use of credit?
The best loan utilization rate is 0% – this means that you are not using any of your available loans. However, if you use your credit cards at all, chances are your credit report will not reflect a zero balance. It is OK.
In general, a good credit utilization ratio is less than 30%. This means that you use less than 30% of the total loan available to you. To get 30% credit utilization, you should keep your balance below the 30% credit limit. Anything above 30% can lead to a decline in credit score.
On a credit card with a $ 1,000 limit, this means keeping your balance below $ 300.
Credit Purpose Calculation
Because credit use is an easy relationship, you can easily evaluate your credit use. All you need to know is credit limits and credit card balances. You can obtain this information by checking your most recent credit card statement or logging into your account online.
Credit utilization is calculated by dividing the credit card balance by the credit limit. The result is a decimal value, for example 0.5678. Multiply that number by 100 (or simply move the decimal two places to the right) to get a percentage. The result is your loan utilization expressed as a percentage – 56.78% in our example.
When your credit score is calculated, it uses the credit card information available on your credit report, which may differ from your online balance. This happens when you have paid or used your credit card since you last updated your account information in your credit report.
How to reduce usage?
Using a loan is a fluid number. It changes as credit card balance and credit card changes change. You have the ability to reduce your high credit utilization and this will be reflected in your credit report and your credit score the next time your credit card company reports your balance information. There are usually two ways you can improve your loan utilization.
First, you can reduce your credit card balance. Pay as much as you can for your credit card to quickly prevent your credit from being used. Keep in mind that a credit card company can’t report the balance until the end of your billing cycle, so leave your balance low until then to make sure it’s displayed on your credit report.
If you can’t afford to pay off your balance right away, refrain from buying new credit cards and lower your balance as much as you can.
Another way to reduce credit utilization is to have your credit card issuer increase your credit limit, which may not be easy, depending on your income, credit history, and time since you last increased your credit limit.