Let's break down what "utilization" is
Credit utilization—otherwise known as debt-to-credit ratio—the amount of revolving credit you're currently using divided by the total amount of revolving credit you have available.
So, say you have a credit card balance of $500 right now after making some car repairs, and a credit limit on that card of $5,000. Your credit utilization would be $500/$5,000 which equals a credit utilization of 10%—you're using 10% of the credit you have available. If you have multiple credit cards, you would add up all of your current balances and divide that by the total credit limit across all of your cards.
How credit utilization is important when calculating scores
Let's back up and talk about credit scores
Your credit score is a three digit number used to determine your creditworthiness, usually on a scale of 300 to 850. Banks, landlords, utility companies and other lenders use your credit score to determine how likely you are to repay debts on time. Your credit score can determine your eligibility for loans or credit cards, as well as the interest rates you’ll be charged for those products.
Scores range from "Poor" to "Excellent" with 300 being the worst credit score (indicating high risk) and 850 being the best credit score (indicating low risk).
The FICO model calculates your credit score based on a variety of factors, each with its own weighted value:
Payment history: 35%
Length of credit history: 15%
Credit mix: 10%
Recent behavior / inquiries: 10%
Credit utilization makes up 30% of your calculated credit score, which is the second highest-weighted factor.
How credit utilization impacts your credit score (and what to do about it)
You may not have as much control over your age and type of credit, or credit inquiries that contribute to your score, but you do have control over how much credit you use (credit utilization) and how frequently you make payments.
This is great news! You have the power to increase your score by keeping your utilization low, and your payments on time.
A good rule of thumb to maintain a good credit score is to use 30% or less of your total credit (a credit utilization of 30% or lower). This means that if you have $10,000 in total available credit, you should never exceed a balance of $3,000.
Occasionally, you'll need to make a big purchase and go over that 30% limit. That's alright, as long as you pay down the balance within your grace period—AKA the amount of time you have to pay off your balance before interest accrues.
Making frequent payments—potentially multiple times a month—helps to keep your credit utilization low. Your potential to increase your credit score will be even better if you pay your credit card off in full each pay period.
You can do this automatically using SmartPay, which helps you grow credit by automatically making payments multiple times a month using cash that's safe to spend based on your rules. This keeps your utilization low, and your payments on time.
Credit utilization is not only a major factor in your credit score, but it's also one you can control. Using 30% or less than your total credit limit will help you to maintain a good credit score. The best way to do this? Try making multiple payments throughout the month and aim to pay your balance down in full whenever possible.
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