Credit Utilization Explained
Credit utilization calculator
Credit utilization is an important factor that lenders consider when determining your creditworthiness. It measures how much of your available credit you use at any given time and is typically calculated by dividing your total credit balance by your total credit limit. Your credit utilization ratio can majorly affect your credit score, so it’s important to understand how it works.
Credit utilization is important because it shows lenders how likely you are to be able to pay back any money they lend you. A high credit utilization ratio can indicate that you're relying too heavily on borrowed money, which lenders may view as a sign of financial distress. On the other hand, a low credit utilization ratio indicates that you're managing your debt responsibly and not overextending yourself.
Credit utilization ratio
When calculating your credit utilization ratio, lenders look at the total amount of credit you have available and the total amount of credit you currently use. Your credit utilization ratio is calculated by dividing your total credit balance by your total credit limit. For example, if you have a total credit balance of $5,000 and a total credit limit of $10,000, your credit utilization ratio would be 50%.
Your credit utilization ratio is one of the most critical factors that affect your credit score. Generally, the lower your credit utilization ratio, the better it is for your score. A credit score above 30% is generally considered good, while a score above 50% is considered bad. It's important to remember that it's not just your total credit utilization ratio but your individual utilization ratios for each account.
It's essential to keep an eye on your credit utilization ratio and strive to keep it as low as possible. Paying off as much of your monthly balance as possible is the best way to keep your ratio low. Additionally, increasing your credit limit can help lower your ratio, but only if you don't increase your spending as well.
What are the five components of credit reports?
The five components of credit are payment history, amounts owed, credit history length, credit mix, and new credit. Payment history accounts for 35% of your credit score and is the most important factor in determining your creditworthiness. It is based on whether you pay your bills on time and in full. Amounts owed account for 30% of your credit score and are based on how much of your available credit you are using.
Credit history length accounts for 15% of your credit score and is based on how long you have had credit accounts. Credit mix accounts for 10% of your credit score and is based on your different types of credit. New credit accounts for 10% of your credit score and is based on whether you have recently opened new credit accounts.
How does my credit utilization score affect my chances of getting new credit cards?
Your credit utilization score can significantly impact your chances of getting approved for a new credit card. A low credit utilization rate indicates that you are managing your debt responsibly and not overextending yourself, which lenders view favorably. Conversely, a high credit utilization rate may signal to lenders that you are more likely to default on a loan, and they may deny your application.
It's important to remember that lenders may also look at other factors, such as your credit history, income, and credit score, when deciding whether or not to approve your application. Here is a great article that breaks down credit utilization relating to credit cards.
Should I be rotating my credit card usage to affect my utilization score?
Rotating your credit card usage can positively impact your credit utilization score. By rotating your credit card usage, you can spread out your spending across multiple cards, thus limiting your overall credit utilization ratio.
This helps show creditors that you can manage your credit responsibly, as you are not relying too heavily on any card. Additionally, rotating your credit card usage can help you take advantage of rewards such as cash back, travel points, and other incentives.
It is important to remember that rotating your credit cards is not a substitute for paying off your balance in full each month. Paying your balance in full each month can help keep your credit utilization ratio low while keeping you from accruing any interest. Additionally, keeping track of your spending and ensuring you are not spending more than you can afford is important.
It’s also a good idea to rotate the use of your credit cards so that your creditor doesn’t close it for being inactive, which can impact your credit score by lowering your total credit limit.
Another negative effect is paying your credit card balance before a payment history can even post to the credit bureaus. If you are vigilant on paying off your debt, at least let it post to the credit bureaus, then make your payment; otherwise, the bureaus will not see it, and it will look like the card is not being used.
Are credit utilization thresholds different between the three credit bureaus and their algorithms?
Credit utilization thresholds vary between the three major credit bureaus and their credit scoring models. Generally, most credit scoring models recommend keeping your credit utilization below 30%. However, there can be variations between the credit bureaus and their scoring models.
For example, FICO® considers credit utilization when calculating its score, while VantageScore® considers debt to be “extremely influential.” Additionally, some credit card issuers may also have their own credit utilization thresholds, which can vary from the industry standard.
It is essential to be aware of any variations when managing your credit utilization because your credit scores can fluctuate based on them. You may have a credit score of 750 on TransUnion but 700 on Experian.
Can you explain the difference between revolving credit balances and revolving credit utilization?
A revolving balance is the total amount of debt on your credit cards or lines of credit. This includes any outstanding balances, interest charges, and other fees. Revolving utilization is the amount of available credit you use relative to your total credit limit. It is calculated by dividing the total balance on your credit cards by your total credit limit and is expressed as a percentage. For example, if your total balance is $1,000 and your total credit limit is $5000, your revolving utilization would be 20%.
Does having an authorized user on my credit card affect my utilization score?
Yes, having an authorized user on your credit card can affect your utilization score. The authorized user will access your credit card, and any purchases they make will be added to your credit utilization. If the authorized user makes purchases that increase your total balance relative to your total credit limit, this could hurt your utilization score. It is important to monitor your credit utilization when you add an authorized user to your credit card.
Credit utilization examples
The credit utilization ratio is the amount of credit you use compared to the total credit available, expressed as a percentage. Here are some examples of how the credit utilization ratio is calculated:
If you have a $500 credit card balance on a card with a $1,000 credit limit, your credit utilization ratio is 50%. [1]
If you have two credit cards, each with a $1,000 limit, and owe $500 on one and $250 on the other, your credit utilization ratio is $750 divided by $2,000, or 37.5 percent. [1]
f your credit utilization ratio is 25 percent, you’re using 25 percent of your credit. For example, if you have a single credit card with a $10,000 credit limit and currently have a $2,500 balance, your credit utilization ratio is 25%. [2]
If you have $10,000 in credit available on two credit cards and a balance of $5,000 on one, your credit utilization rate is 50%. [4]
Say a borrower has three credit cards with different revolving credit limits. Card 1: Credit line $5,000, balance $1,000; Card 2: Credit line $10,000, balance $2,500; Card 3: Credit line $8,000, balance $3,000. The total balance is $6,500, and the total credit limit is $23,000. The borrower's overall credit utilization ratio would be 28.26% ($6,500 divided by $23,000). [5]
Keeping your total credit utilization rate below 30% is generally recommended. [4]
To improve your credit utilization ratio, consider the following strategies:
To maintain low credit card balances, paying more than the minimum required amount is advisable. Ask for a credit limit increase, which could help improve your credit utilization ratio.
A helpful tip to maintain low credit utilization throughout the billing cycle is to consider paying off your credit card balances multiple times a month.
It's best to avoid closing credit card accounts you don't use because doing so may decrease your total available credit and raise your utilization ratio.
It's always a good idea to monitor your credit card balances and make necessary spending habits adjustments to ensure your utilization rate stays low.
