What is Credit Utilization and How does it Impact Your Credit Scores?

Highlights

• Credit utilization, the amount of credit used compared to available credit, can significantly impact credit scores.

• Keeping credit utilization low can boost credit scores, while higher utilization can lower them.

• Strategies to maintain healthy credit utilization include keeping balances low, paying more than the minimum, increasing credit limits responsibly, and monitoring utilization regularly.

You know your credit score is important. One of the biggest factors that goes into calculating it is your credit utilization ratio or rate.

What is credit utilization? 

Simply put, credit utilization is how much of your available credit you’re actually using. Think of it as a percentage. 

If you have a credit card with a $1,000 limit (available credit) and the balance reported to Equifax is $300 (the credit you’ve used), your credit utilization on that card is: ($300 ÷ $1,000) x 100 = 30%

Why does credit utilization matter for your credit score?

Credit scores are one tool used by lenders to help predict the likelihood that you will pay your bills on time. Statistically, credit utilization patterns can be associated with the likelihood that people will pay their bills on time, so they are one of many factors included in credit score calculations.

• High utilization (using a lot of your available credit) can lower your score because higher credit utilization can be common among people who miss payments.
• Low utilization (using only a small portion of your available credit) can boost your score because lower utilization can be common among people who make payments on time.

Lower credit utilization can demonstrate you’re able to borrow a little bit and pay it back responsibly, rather than constantly maxing out your credit lines and potentially missing payments.

So, what can you do to keep your credit utilization healthy?

• Keep balances low: The most direct way is to simply spend less on your credit cards and line(s) of credit.
• Pay more than the minimum: Making more than the minimum payment helps reduce your outstanding balance faster.
• Pay multiple times a month: Since credit card companies report your balance to credit bureaus once a month, making multiple payments during your billing cycle can reduce the balance that gets reported. This is especially helpful if you frequently use your credit card and pay the full balance. 
• Consider increasing your credit limit: If you have a good payment history, you might be able to request a credit limit increase from your card issuer. This lowers your utilization ratio even if your spending stays the same (but be careful not to be tempted to spend more!)
• Avoid cancelling credit cards: Cancelling old credit accounts can reduce your total available credit, which may increase your credit utilization. If you have older credit cards with no annual fees and/or no refundable deposit (such as with a secured credit card), keeping them open can help decrease your overall credit utilization. 
• Monitor your credit utilization: Regularly check your credit card balance and credit limits to calculate your credit utilization. With a myEquifax subscription, you can easily check your overall credit utilization when you log in. Keep in mind that both overall credit utilization and credit utilization of individual accounts can be factored into credit score calculations.

Keeping an eye on your credit utilization is a step towards achieving and managing a healthy credit score. Implementing these tips today may serve you well in the long run.