Understanding Credit Utilization

How much you owe is an important factor in determining your FICO® Scores, making up 30% of the total calculation. One of the elements that FICO considers in this factor is your credit utilization ratio.

Your credit utilization ratio provides insight into how you manage your credit card debt. While it's a good idea to avoid using too much of your available credit, it also doesn't help if you're not using any at all.

If you're trying to figure out how your credit cards impact your FICO® Scores, here's what you should know.
 

What Is the Credit Utilization Ratio and Why Is it Important?

Your credit utilization ratio is the percentage of the available credit that you're using on a given credit card account, as well as across all of your credit cards.
 
For example, let's say you have three credit cards:
 
Card A has a $5,000 credit limit and a $1,000 balance.
Card B has a $10,000 limit and a $4,000 balance.
Card C has a $1,000 limit and a $750 balance.

To get your utilization ratio for each card, divide the balance by the credit limit, and you'll get 20% for Card A, 40% for Card B and 75% for Card C.
 
To get your aggregate credit utilization ratio, you'll add up the three balances and credit limits, then run the same equation. This would give you a total utilization ratio of roughly 36%.
 
Your credit utilization ratio is important because it provides creditors with an insight into how you manage your finances. Credit cards are generally used for everyday spending, and if you regularly max out your credit cards or get close to it, it could indicate that you're having a hard time managing your money without the use of debt.
 
This could spell trouble if you take on a new credit account and don't have the funds to keep up with all of your financial obligations.
 
As such, the more of your available credit that you're using at a given time, the more at risk you are of defaulting on a payment, which results in a lower FICO® Score.
 

What Should My Target Credit Utilization Ratio Be?

Some financial experts recommend keeping your credit utilization ratio below 30%. However, the data doesn't support the implication that your credit score will dip once your utilization ratio crosses the 30% threshold.
 
Just like every other factor in your FICO® Score, the impact your credit utilization ratio will have on your score will vary based on a number of factors.
 
That said, generally the lower your ratio is, the better. Generally, keeping it below 10% (and consistently paying bills on time) can help you build and maintain a good FICO® Score.
 
That said, you want to be careful about having a utilization ratio of 0%. This is because it signifies that you're not using your credit cards at all, giving FICO less information about how you manage your money. While a 0% utilization ratio won't cause your FICO® Scores to drop significantly, it can prevent you from achieving maximum points for the amounts owed score ingredient.
 

How to Lower Your Credit Utilization Ratio

Your credit utilization ratio is determined by two things: your reported credit card balances and your available credit. Keeping the former low and the latter high is key to maintaining a low ratio. Here are some quick tips to accomplish that goal:
 
Avoid spending too much: Avoid using your credit cards too often, especially if you have trouble overspending or if you have cards with low credit limits. Even a balance of $200 on a card with a $300 limit (e.g. 66% utilization) could negatively impact your FICO® Scores.
 
Hold onto old credit cards: Closing a credit card takes away its available credit, which could increase your overall credit utilization ratio. As a result, it's best to avoid closing credit cards unless you're at risk of overspending and getting into credit card debt or there's an annual fee or security deposit, and you no longer use the card.
 
Make your payments strategically: Credit card companies typically report card balances to the credit reporting agencies based on your balance each month when your statement closes. Making a payment before that date could drop your utilization ratio enough to keep it at a satisfactory level. Alternatively, you could make multiple payments throughout the month to keep it low at all times.
 
Make paying off credit card debt a priority: If your credit utilization ratio is chronically high because you have a lot of credit card debt, make plans to pay down your balances as quickly as possible. Pay down your balances can not only benefit your FICO® Scores by lowering your utilization ratio, but it can also have a positive impact on your budget and overall financial health.
 

The Bottom Line

Your credit utilization ratio is an important factor in your FICO® Scores, so it's crucial that you know where you stand and take steps to maintain a low ratio every month.
 
Depending on your situation, this can take time, but the good news is that, as soon as you lower your ratio, your FICO® Scores will respond accordingly— you won't see lingering negative effects as you would with late payments and other negative items.
 
If you're not sure what your utilization ratio is, sign up for a credit monitoring service and keep track of where you stand. If you want to reduce your ratio, start taking steps now to reduce your credit card debt and maintain a low level going forward

7 Credit Score Destroyers

Your credit score not only determines whether or not you can  get credit cards, cell phones, utilities, a rental apartment, auto loan, auto insurance and even job security clearance or the job itself and a mortgage to buy a home, it’s also a critical factor in determining the interest rates you have attached to all those items. 

A low credit score can cost you a lot of money over your lifetime.

Not everyone is aware of the many factors that determine a credit score. It’s easy to make assumptions that seem logical but are actually false. Acting on incorrect information is a sure way to make critical mistakes.

Save yourself money and make your financial life easier by avoiding these seven credit destroyers:

 1.     Carrying a big balance on your credit cards. While having a lot of debt is never a good idea, using more than 30% of the available credit on your credit cards hurts your credit score.

• For example, if your credit limit is $10,000, your score drops if your balance is over $3,000. This is commonly referred to as the “utilization ratio.” Keep your credit utilization to no higher than 30% of your available credit limit.

2.     Paying late is a huge factor in your credit score. Experts estimate that 35% of your credit score is determined by your payment history. Any late payments will lower your score.

3.     Closing credit cards is a credit score killer. This is related to your utilization ratio. By closing a credit card, you lower the amount of credit that’s available to you because your credit score is also sensitive to the length of your credit history.

4.     Defaulting is an obvious credit score mistake. When you fail to pay back a loan you owe to a lender, you can lose as much as 100 points from your credit score. Make every effort to pay back your loans and to do it on time.

• If you’re struggling making loan payments, no matter the type of loan, contact the lender and try to negotiate other payment arrangements. They can be very flexible if failing to do so means not getting their payments at all.

5.     Applying for too much credit. Everyone needs to have some credit but applying for too much credit does have a negative impact on your score.

• Each time you apply for more credit, your potential lender makes an inquiry of your credit history. 

• Each one of those inquiries lowers your credit score.

• Avoid accepting every credit card offer that shows up in your mailbox.

6.     Not having a credit card at all. Many people are getting rid of their credit cards in an effort to avoid debt. Unfortunately, this does nothing to help your credit score.

• Experts believe that the ideal credit score includes 2-3 credit cards. 

• Credit diversity can account for as much as 10% of your credit score.  

• Credit cards help to keep your credit history current. 

7.     Co-signing a lease or a loan for someone else can be a huge mistake because if they fail to make on time payments can destroy your credit score.

• When you co-sign a loan or lease you are equally responsible for that debt, so any late payments, defaults or even repossesions will show up on your own credit report as if they were yours.

• You can even be subject to collections and lawsuits. If a lender won’t do business with them, you might want to reconsider before co-signing.

By avoiding these common mistakes, you can protect your credit score and a good credit score guarantees you the lowest interest rates. And don't worry even if your credit score is poor now it is possible to repair your credit and boost your credit score with a good DIY credit repair system. 

Give your credit score the amount of attention it deserves. It makes life a lot easier! If you or someone you know would like more information about MyCreditSystem click on the link. 

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8 Good Reasons to Use a Credit Card

 

Personal finance gurus spend a lot of time and energy attempting to prevent us from using credit cards, usually for very good reasons.

Credit cards are frequently abused and are the cause of a lot of personal debt. However, credit cards bring you a lot of advantages as long as you use them wisely. In fact, credit cards are frequently a better way to pay for things.

Consider these benefits:

1.) Sign-up bonuses. Many credit cards offer significant rewards when used responsibly. For example, consumers with good credit can be approved for credit cards that offer signup bonuses. These bonuses can be worth $50 to $250 or even more. Some credit cards provide reward points that can be used to redeem things like gift cards or airline tickets and much more!

2.) Cash back. With the right credit card, you can earn from 1-5% back on all your purchases. Depending on how much you use it, that can be like getting a raise at work!

3.) Investment rewards. Some credit cards, such as the Fidelity Investment Rewards Card, give a higher rate of cash back. However, that cash back must be deposited directly into an investment account. This is also nice because it encourages you to invest and save.

4.) Frequent-Flyer miles. Nearly every airline has at least one credit card offering. The ultimate value of these cards is really determined by the specifics of the card and the airline tickets you actually receive and use. The details can vary so shop around.

5.) Safety. Using a credit card makes it a lot easier to avoid financial losses due to fraud or unfortuna timing on automatic payments.

For example, if you pay your bills with automatic payments directly out of your checking account, these automatic drafts can also potentially result in insufficient funding fees and late payments, which will have a negative effect on your credit score.

If your debit card is used fraudulently, your money is taken out of your account instantly. It can also take some time to get your money back. By comparison, when your credit card is used fraudulently, you don't lose any money; you simply notify your credit card company and you don't have to pay for those transactions.

6.) Grace period. Credit card usage gives you time to pay, usually a couple of weeks on the average before any interest kicks in. With a debit card, the money is gone instantly. If you have your money in a high-interest checking account, the amount of interest you will earn can be significantly more over time by paying for your purchases with a credit card.

When you put your purchases on your credit card, your money will spend more time in your checking account, where it's earning money for you. If you use a debit card for your purchases, the money is in your account for a much shorter length of time, thus earning less interest. 

7.) Insurance. Most credit cards include a plethora of consumer protections that most people aren't aware of. This includes things like rental car insurance and travel insurance. Some product warranties are also made more advantageous when you pay for the item with your credit card. 

8.) BUILDING CREDIT

If you don't have a credit history or if you need to improve your score, a credit card can help raise your credit score. Obviously, this assumes that you use your card wisely. Debit cards do nothing to help your credit score.

As you can see, credit cards aren't bad provided you use them responsibly. In fact, credit cards have a lot to offer. So dust off that credit card and put it to good use; just be sure to pay it off in full every month or as close to it as you can to maintain a good credit score.

One Quick Way to Boost Your Credit Score

There are many different factors that go into your credit score, also known as FICO score. Your FICO score is calculated based on your credit report by a formula created by the Fair Isaac Corporation. However, FICO does not actually disclose its exact formula. 

Though nobody knows exactly how important each factor is in calculating the credit score, one known factor that plays a large role is your utilization rate. 

Your utilization rate is basically "how much of your available credit are you using?" 

The theory is that if someone has credit lines of $10,000 and they're using $9,500 of that credit, they're a much bigger credit risk than someone who's only using $1,000. Therefore, their credit score would be lower. 

However, there are a few things about the way FICO calculates your utilization rate that are a bit strange. One small loophole in particular can result in you being able to quickly boost your credit score without actually having to reduce your credit balances. 

The Odd Thing about Credit Utilization 

Rather than measuring your average utilization rate, FICO chooses to measure your score based on your highest utilization rate. 

For example, let's say you have two credit cards. Both of them have a $5,000 limit. One card is maxed out, while another card has a balance of zero. 

In this case, your maximum utilization rate would be 100%. In this case, your credit score will be severely negatively impacted. 

On the other hand, if you had distributed your credit balance half and half over the cards, your maximum utilization would be only 50% each. 

Another example would be if you had one card with a $1,000 limit and another card with a $5,000 limit. If you had to charge $800, it's a much better idea to charge it to the $5,000 card. 

A Few More Things to Know about Utilization Rate 

The ideal utilization rate is 35% or under on all your cards. Having even one card above 35% will drag your max utilization up. 

In an independent study of 70,000 different credit scores, researchers found that people with 720 or higher credit scores tended to have utilization rates of 20% or less. 

However, people who had a zero percent utilization rate often had very low credit scores. That's because their credit scores were so low, they couldn't even get a credit card. 

The ideal is not to have a zero percent utilization rate. If you're not using your credit cards at all, you're not demonstrating creditworthiness. Remember - creditors want to know that you'll pay off loans you take out, not that you don't take out loans. 

So try to get your utilization rate between 1% and 35%. If you have a low balance on one card and a high balance on the other, try balancing your cards out to get your maximum utilization rate down. This one technique can very quickly give you a credit boost, literally in just a few days.