Credit Utilization & How It Affects Your FICO Score 

Credit Utilization & How It Affects Your FICO Score 


What is Credit Card Utilization? 

Credit card utilization is a ratio of the amount of money you owe on your credit cards versus the cards limits. In other words “How much of your credit limit are you using?”. To calculate credit card utilization, the amount of money you owe on your credit card is divided by your credit card limit, and the result is expressed as a percentage. Therefore, if you have a credit card limit of $1,000, and you’ve already spent $400 on your card, your credit card utilization is 40-percent. Low credit card utilization is good, while high utilization is bad for your credit score. Amounts owed also known as utilization, make 30% of a FICO score.


How Credit Card Utilization Affects FICO Credit Scores:

Your credit score is calculated based on the information available on your credit report, and credit card companies always update this information at the end of every billing cycle. The FICO scoring model uses your credit card utilization information in two ways. The first way is known as per-card utilization or line-item utilization. This considers the credit utilization of each of your credit cards individually. The second way is known as overall utilization or aggregate utilization. Here, FICO considers the total outstanding balances on all your cards, compared to a total of all your card limits.

The credit score takes both per-card utilization and aggregate utilization into account when calculating your credit score. Since the credit utilization ratio on all cards matters, it is important to be very careful with the cards you use. For example, some retail stores and department stores offer credit cards, but the limit is significantly lower than credit cards offered by banks. Having high credit utilization ration on such cards can affect your score, even if you are careful with other credit cards.


Why is High Credit Card Utilization Bad? 

Lending institutions often use a credit card to gauge your likelihood of repaying their money. If you owe a lot of money, you are considered a bigger lending risk. A high outstanding balance on your credit card is a lot harder to pay, and it could signal to financial lenders that you are overextended. It also signals to them that you are more likely to default on your payments. This could affect your chances of being approved for loans, and it could mean you will pay a higher interest on the loans you get.


How to Get the Best Credit Card Utilization: 

Most experts will tell you that a credit card utilization score of 30-percent or lower is always best. Therefore, it is important to be very strategic about managing all your credit cards. The following are some tips that can help keep your credit card utilization lower:

  • Be aware of how much you charge on each card. Log in to your online account at least once a week to keep tabs on your spending. If the total is close to 30%, switch to a different card.


  • Ask if your credit card issuer can raise the limits on some of your cards. Raising the limit instantly lowers your credit utilization score. However, you should only do this if you have the discipline to not go on a shopping spree and if you believe your credit score is high enough to qualify.


  • Find out when your issuer reports your credit card information to credit bureaus. This is usually once a month, and the date varies from one lender to another. Make sure you pay as much of the outstanding balance as possible before this date.


  • Try paying your debts mid cycle. Paying outstanding balances on your credit card twice a month instead of once can help reduce credit card utilization while increasing your credit score. However, for this tip to work, you must pay enough each time to keep your credit utilization below 30-percent.


By following the steps above and with good discipline, you can maintain good credit card utilization, resulting in a healthy credit score.

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