What is Credit Utilization and Why is It Important?

If you have never heard of credit utilization, it is important that you take a moment and learn about this important topic and what it really means. Most people today have learned just how important their credit score is and just how important it is to maintain a good credit score. Your credit score is essential to getting a loan, buying a house and getting assistance from any bank. In order to maintain a great credit score, you need to make sure that you are paying attention to your credit utilization percentage.

What is Credit Utilization?

Simply put, your credit utilization amount is the percentage of your credit limit that you are using. For example, if your credit card has a $1,000 limit and you have a balance of $200, then your credit utilization rate is 20%. It is important that you work to keep your credit utilization rate as low as possible. For example, a 20% utilization rate is better than a 60% utilization rate. This rate is very important. It varies from time to time, depending on the card and how much of a balance you are carrying. Your credit utilization rate changes just as much as your overall credit score.

How Does it Impact Your Credit Score?

Your credit utilization rate is important and it impacts your credit score. There are actually two different ways that your credit utilization rate can impact your credit score. The total credit utilization rate and your individual rates can both impact your score. First, your aggregate is calculated. This is how much your total credit limit is for all of your loans and all of your cards, divided by your total balance. There are also individual utilization rates for each of your cards. This number is also important. Having a $500 balance on a $1000 card is more detrimental than having $500 on a $5,000 limit card.

How Can I Decrease My Utilization?

Your utilization rate is an important factor in determining your overall credit score. Many people think that their credit score just has to do with the total balance of their credit cards. However, there is more to your credit score than just the actual number. The utilization rate is also important as well. With this in mind, you want to make sure you are trying to decrease your utilization rate. Look at your credit balances and do the math to see what your utilization rates are. Look at which cards have the highest utilization rates, these are the ones you want to lower first. Start paying more than your overall minimum amount due on all of these cards, focusing on the ones with the highest utilization rates. The more you can pay down, the better off you will be.

Working on your credit utilization rate is one of the best ways that you can get your credit score under control and to keep it under control for the future.