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Understanding Credit Utilization

Credit Utilization and Your Credit Score

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There are five major factors that influence your credit score: payment history (35%), level of debt/credit utilization (30%), age of credit (15%), mix of credit (10%), and credit inquiries (10%). Credit utilization has a big influence on your credit score, but what is it and how can you manage it to get the best credit score?

Calculating Credit Utilization

Credit utilization is the ratio of your credit card balances to credit limits as listed on your credit report. For example, if your balance is $300 and your credit limit is $1,000, then your credit utilization is 30%. To find out your credit utilization simply divide your credit card balance by your credit limit then multiply by 100. The lower your credit utilization, the better. That shows you're only using a small amount of the credit that's been loaned to you.

Two Ways to Consider Credit Utilization

The FICO scoring model looks at your credit utilization in two parts. First, it scores the credit utilization for each of your credit cards separately. Then, it calculates your overall credit utilization, that is, the total of all your credit card balances compared to your total credit limits. A high credit utilization in either category will lower your credit score.

Credit utilization is 23% of the VantageScore, another type of credit scoring calculation, but the score also considers your balances as 15% and available credit as 7% of its score. In total, the amount of your credit card debt affects 45% of your VantageScore.

Keep Your Utilization Low

You can't trick the FICO score into thinking your credit utilization is low by paying your balance in full at the end of each month. Even though your credit card balance will be $0 at the time, that might not be the balance that was reported to the credit bureaus. That's because your credit card issuer can report your credit card balance to the credit bureaus at any time, not necessarily right after they've received your monthly payment. If your balance is high when your issuer sends your data to the bureaus, then the credit utilization used in your credit score will also be high. To keep a low credit utilization, you should always keep a low credit card balance.

If, for some reason, your card issuer cuts your credit limit at or below your credit card balance, it's important to reduce your credit card balance to lower your credit utilization. This is especially true about closing credit cards, when your credit is typically reduced to $0.

A high credit utilization won't hurt your credit score forever. As soon as you reduce your credit card balances (or increase your credit limits), your credit utilization will decrease and your credit score will go up.

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