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What is credit utilization?

Credit card utilization has a big influence on your credit score.
Find out what it is and how you can improve your credit utilization ratio.
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One of the biggest influences on your credit score is your credit utilization. This ratio measures your outstanding balances against your total available credit across all accounts. For example, if you have two credit cards, each with credit limits of $5,000, and have spent $3,000 on one, your credit card utilization would be 30%.

Individuals and small business owners should closely monitor their credit utilization. Lenders consider this ratio when evaluating credit applications. The better your ratio, the more likely you are to qualify for new credit and receive more competitive borrowing terms.

What is a good credit utilization ratio?

A low credit utilization ratio shows you’re a low financial risk, as you’re unlikely to overextend your debts. The major credit bureaus recommend that your total credit utilization ratio does not exceed 30%. Ratios above this can indicate to lenders that you’re struggling to manage your finances.

While low credit utilization ratios indicate responsible borrowing, a ratio of 1% may be preferable to 0%. A ratio of 0% may show credit agencies that your accounts are currently inactive.

How does my credit utilization affect my credit score?

Your credit utilization has a significant influence on your credit score, accounting for up to 30%, depending on the scoring model. The only factor with more of an impact on your credit score is payment history.

Credit bureaus and reporting agencies will analyze your credit utilization based on your individual credit accounts and your collective available balance. That’s why it’s important to manage all of your credit accounts responsibly.

A credit utilization ratio above 30% — even if it’s just on one credit card — can damage your credit score. A lower credit score can make it more difficult to secure credit in the future. It can also result in lenders offering you lower credit limits and higher interest rates.

How can I improve my credit utilization?

The simplest way to bring your credit utilization down is to clear some of your current debt. Making payments reduces your outstanding balance and improves your utilization ratio. It’s also a good idea to check when your issuer reports your information to the major credit bureaus. If your monthly payment date is after this time, pay earlier or make multiple payments per billing cycle. This shows the credit bureaus you are clearing your balance each month.

Many issuers offer balance alerts. These can be handy reminders to make regular monthly payments. They can also notify you if your balance exceeds a set amount, helping you to avoid overspending.

Another way to improve your credit utilization ratio is by increasing your credit limit. You can do this by requesting that your issuer increases your existing credit limit. They are more likely to increase your limit if you have proven you are a responsible borrower who makes payments on time. Make sure you do not start spending more on the account as a result of a higher limit.

You can also improve your overall utilization ratio by applying for a new credit account. Remember that credit checks appear on your credit report, so making multiple credit inquiries can cause your credit score to dip in the short term.

When you pay off a credit account, it’s worth keeping it open, even if you don’t need it anymore. Cancelling a credit card lowers your total available credit and can increase your utilization ratio.

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