Many factors affect your credit score. Credit usage, or the amount of credit used compared to the total credit given to you, is one of the most important factors affecting a credit score. Especially when considering using your credit to apply for a mortgage, credit card, or auto loan, understanding what credit use is and how it can affect your credit score remains critical.

What is credit utilization?

Credit utilization is the ratio of your overall credit balances (the amounts you currently owe to various lenders) to your credit limit (the maximum amount you have been allowed to borrow). To calculate this rate, take the current amount you owe, divide it by your credit limit, and multiply by 100.

Here’s an example: If you owe $500 on a credit card and the credit limit is $1,000, to find your usage percentage, you’ll need to divide $500 by $1,000. That leaves you with .5. Now you need to multiply that number by 100, which gives you 50. This means that if you carry a balance of $500 on a card with a limit of $1,000, your usage will be 50%.

What is a good credit utilization ratio?

Conventional wisdom suggests that credit scores benefit the most when credit utilization remains below 30%. Those who can keep credit utilization below 10% may see even better results. In general, the lower the ratio, the better. The higher the ratio, the greater the negative impact on your credit score.

How does using credit affect my credit score?

Lenders may consider you a high-risk borrower if you use more of your credit, and your credit utilization rate may negatively impact your credit score if you let it get too high. Although it is, of course, not the only factor affecting your credit, the use of credit accounts for up to 30% of your credit score.

How much of my credit card limit should I use?

You should aim to use no more than 30% of your credit limit at any given time. If you allow your credit utilization ratio to exceed this threshold, it may cause your score to drop temporarily. Fortunately, paying it off quickly should bounce your score, though you’ll have to wait for your bank to report the new balance to the credit bureaus. Depending on the bank, it may take 30 days or more.

Paying off your balance several times a month can also help keep your credit score lower despite higher overall monthly credit usage. Paying off your balance often doesn’t guarantee that your credit usage won’t increase, but it does increase the chances that your bank will report your card balance to a credit bureau on a day when your usage is, in fact, lower.

How can I increase my credit card limit?

If you find yourself regularly using the majority of your credit limit, it may be a good idea to increase your line of credit instead. Most major credit card providers offer the option of applying for a credit increase online, which is the easiest option, especially if you have a relatively strong case for increasing your credit, such as a long payment history. punctual. You can also request a credit increase via a phone call to your card issuer.

You can also apply for additional lines of credit or additional cards to increase your overall credit limit. Do it responsibly – asking for too many cards in too little time can also negatively impact your credit score.

If you want to reduce your overall available credit, do not close open accounts. Closing open accounts will reduce the amount of credit you have and thus increase your credit utilization rate. Closing older accounts can also have other repercussions on your credit score; the age of your oldest active account is a factor in evaluating your credit history and the longer your history, the better.

Conclusion

Your credit utilization rate affects your credit score. Try to keep your overall credit usage to around 30% of your overall credit limit, or even less. Extend your overall credit availability by requesting additional lines of credit, but don’t ask for too much at once.