Improve Your Understanding of Credit Utilization

    What is Credit Utilization?

    Credit utilization has a relationship with your credit scores. The scores depend on various factors, which include level of credit utilization, payment history, credit age, credit inquiries and mix of credit. Utilization and history of payment are the two most important factors. Get those two in order and you will not have to worry about how they affect your credit scores. Focus on these factors and you will have made some headway in trying to increase your credit.

    It is expressed as a ratio. It is the expression of your credit limits vis-à-vis credit card balances.

    Credit utilization ratio is a measurement of the number of total credit limits you’re using.

    You need to learn the formula for arriving at this number. A bit of math is involved as it’s the case when you calculate your credit score. The formula is quite simple. First, you need two figures. One is the credit limit. The next is credit card balance. Divide the balance by the limit to arrive at the utilization after multiplying whatever you get by 100. You are in the black if your utilization is lower.

    A higher figure gives you a reason to be wary of your credit report.

    How does it factor into your scores?

    It’s good to know the relationship that exists between the utilization and your scores. A good understanding of this issue would save you from worries and frustrations regarding your credit history. First, low utilization rates boost credit scores. The rate is susceptible to fluctuations, which are often the result of ever-changing balances. For this reason, you may need to show be more concerned about your balance alerts.

    Your focus, therefore, should also be on maintaining the utilization at low rates.

    You can take a few measures to achieve that goal. First, set up balance alerts. Two, find ways of raising the limits on all your cards. It would also be great to monitor the amounts you charge on each of your cards. Familiarize yourself with how credit card issuers operate with the aim of discovering the dates or times when they report to credit bureaus. Limit yourself to spending around 30 percent of the total available credit on your card.

    Be more knowledgeable

    Be informed. Nothing will work for you better than the information that is in your possession. For example, do you know how to inquire your credit affects your scores? Therefore, be careful with every submission. Inquiries offer more insights regarding the true nature and state of your financial situation. In fact, inquiries shine more light as the credit report may have been unable to capture everything. Don’t take these inquiries lightly, especially if your scores are bad.

    How much of your available credit are you using? Keep tabs on the amounts you use. Financial management skills would also prove quite helpful for you on this matter. The debt to credit ratio should remain at 30%. If it does, you will never have to worry about your credit utilization ratio keeps getting out of hand. Keep a close eye on billing cycles too to avoid going over and above this recommended limit.

    Idealism and realism would also have something to say on this issue. Ideally, you should limit yourself to the recommended amount, as stated above. In reality, however, you may never be able to have plenty of credit available on your card at any given moment. Work your way towards the recommended level, if you care about your credit scores. A higher credit is good but only if it doesn’t affect your utilization rate or credit history.

    Tame your appetite for buying things, especially the ones you don’t need. Fiscal discipline applies to personal finance. Monitor your incomes and expenses. Stop overspending on gifts. Do not buy anything impulsively. Keep track of your billing cycles too. Each month, limit yourself to spending less than what you earn. Review all your credit card statements while identifying and disputing any errors, inaccuracies and erroneous charges they contain.

    Assessment of risk

    It’s good to note that the utilization rate validates or disapproves you as a borrower worth lending any amount of money to. It assesses the risks the lender takes by lending to you. After all, lenders would like to know that you will not take off and disappear with the money they lend you. Stop charging all the money that you can constantly by hitting or surpassing your credit limits on a regular basis. That habit will negatively impact your chances of getting loans.

    It’s worth noting that the utilization ratio doesn’t change even when you shift your balances from one card to the next. Even if you do this, the ration would remain unmoved. It still looks at outstanding debt vis-à-vis credit limits. In the long run, however, you may enjoy a few extra benefits when you transfer the balances to cards with lower interests. The balances remain low when you accumulate low interest.

    Should you close credit card accounts that you don’t use anymore?

    Ideally, nothing would be wrong in taking this measure. The reality, though, is that you could suffer by taking such course of action. Closing such accounts affects your scores negatively. It does this by reducing the total credit that is available to you. Remember the golden rule; increased ratios = low scores. In the same vein, it would be risky to add new credit cards primarily because they will lower your utilization ratios.

    In calculating the utilization rates, you also have to be aware of the lines of credit. Don’t take on more debt with your credit cards than you’re able to repay. That said, you have no reason for worrying about the effect your car loan or mortgages can have on the utilization ratio. Don’t worry since these two items have no effect whatsoever on the utilization. However, they play a significant role in your overall scores. Therefore, be careful with them – and all loans – too.

    Read anything that you see advertised by a credit agency or bureau. Read what the card issuers also have to say. Advertiser disclosure can affect your credits and the utilization ratio too. Read what they have to say on issues such as credit line that you can access or add at any given moment. Familiarize yourself with their scoring models that the agencies relied upon to provide reports apply.

    Remember, nothing is as harmless as it seems.

    Keep your loan balances down.

    Avoid high credit cards too.

    Ensure that the information your issuer sends to the bureaus favors rather than harms you.  

    The most important lesson here is that you must keep your credit utilization rate low.

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