Your credit score is a number that represents your creditworthiness to lenders. It is based on various factors, including payment history, length of credit history, types of credit, and credit utilization. Credit utilization refers to the amount of credit you are using compared to your total available credit.
Many people don’t realize how important credit utilization is in determining their credit score. In fact, credit utilization accounts for 30% of your FICO score, which is the most commonly used credit score in the United States. This means that even if you have a perfect payment history and a long credit history, your credit score can still be negatively affected if you have high credit utilization.
So, what is considered a good credit utilization rate? Generally, it is recommended to keep your credit utilization below 30%. This means that if you have a credit limit of $10,000, you should aim to use no more than $3,000 of that limit. However, if you can keep your credit utilization even lower, say 10%, it can have an even more positive impact on your credit score.
It’s important to note that credit utilization is calculated across all of your credit accounts, so it’s not just about keeping one credit card’s balance low. You should aim to keep your overall credit utilization rate low, which means paying off multiple credit cards and other debts.
Another thing to keep in mind is that credit utilization is calculated based on your balance at a certain point in time. This means that even if you pay off your credit card balances in full each month, if your balance is high on the day your credit card company reports to the credit bureaus, it can negatively impact your credit score. To avoid this, you can make multiple payments throughout the month or try to keep your balance low at all times.
In addition to affecting your credit score, high credit utilization can also make it more difficult to get approved for new credit. Lenders may see you as a higher risk if you are using a large percentage of your available credit, even if you have a good credit score.
In summary, credit utilization plays a crucial role in determining your credit score. To maintain a good credit score, it’s important to keep your credit utilization low by paying off multiple credit accounts and keeping your balance low. By doing so, you can not only improve your credit score but also increase your chances of getting approved for new credit in the future.