What Does Credit Card Utilization Have To Do With My Credit Score?

You’re likely aware of how credit cards allow you to build up a credit history and the importance of a good credit score to get lower interest rates, easier approval for housing, better car insurance rates, and more. What you may not know is how credit card utilization will affect your credit score. Most people think only payment history and whether they pay their bills in full and on time affect their credit score, neglecting to consider how they use their credit card. Credit card utilization can harm your credit score, so read on to understand what it is, how to calculate it, and how it impacts your credit score.

What is a Credit Utilization Ratio?

A credit utilization ratio, also called a credit utilization rate, is a measure of how much of your available credit you are using. The ratio is calculated using your outstanding credit card balances and current limits and is typically expressed as a percent. A credit utilization rate can be calculated to find the ratio for just one card or multiple cards. Sometimes, your credit utilization rate may include the type of credit and debts associated with a car loan, mortgage, student loan, and any other type of credit. This ratio commonly makes up 30% of your overall credit score, and many experts advise against using more than 30% of your available credit at any given time.

How to calculate your Credit Utilization Ratio

Understanding how to calculate credit card utilization rates is not too difficult. First, add up all the credit limits on your credit cards. If you don’t know what they are, these can typically be found by logging into your credit card account. After adding up the limits, add up the balances on each of these cards. Then simply divide that balance by the limit and multiply by 100. This gives you your utilization credit score expressed in a percent. If you want to double-check your work, there are a variety of different tools and credit card utilization calculators that can be found online, such as this credit card utilization tool from Bankrate.

Does a high balance impact your credit score?

Card issuers report the balance of your credit cards to major credit bureaus once a month, and this data is then factored into your credit score. New levels of credit utilization only count towards your score when a new credit card balance is reported. While high credit card usage with a utilization of above 30% will have a negative impact on your overall credit score, it won’t be a disaster for your credit score in the long run if you don’t make it a habit. Keep in mind credit scores are calculated when requested, so requesting a credit score during months where you have low credit card utilization can give your score a boost.

Keeping your credit card utilization rate below 30% will help improve your chances of qualifying for loans, particularly unsecured loans. With over 15 years of experience guiding borrowers through the lending process, Unsecured Funding Source can help you get the loan you need to start or grow your business. Contact us today to see if you qualify for an unsecured loan!

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