One of the most important things credit companies do to factor in your total credit score is they look at your balance to limit ratio. Your rate of utilization is simply the percentage of the total limit based upon your current balance.
To illustrate how important this factor is, Credit Karma sampled approximately 15 million Credit Karma members who visited the site in 2014 and compared their credit scores and corresponding credit card utilization rates. (Graph Provided by Creditcarma.com)
The correlation here is very easy to see. If you max out your card, and don’t pay it down, you are going to have problems. The lower the utilization rate, the higher your score, that is, with the exception zero utilization. As you can also see, not using your card at all is not the best option. The better choice would be to use the card for purchase during the month, then always keep that utilization at about 30%. This gives you credibility and proves to creditors that you can be responsible with money.
What this Means…
Lenders don’t like high utilization rates because it tends to indicate there’s a higher chance of you not being able to repay debt. Keeping your credit card utilization low at about 30% is the most ideal range. Creditors need to see proof, long term, that you can manage money and credit–something you can’t do without using the credit you’re granted.
If you’re uncomfortable with the idea of using your card for large purchases, you can still show an active credit profile by paying for small items with your card. It’s important that you practice good habits when managing your credit cards. Charge what you can pay back and make sure your payments are on time. In order to keep your utilization rate greater than 0%, you’ll need to let your charges show up on your billing statement, and then you can pay it off in full. This does not mean you need to carry a balance from one month to the next–doing so may just cost you money in the form of interest.
Credit utilization is just one of many factors when generating an overall score
Credit card utilization % is definitely an important aspect of your credit worthiness, and more than likely will have a significant impact on credit health, but it’s not the only factor these lenders care about. Basically, and what it comes down to, is it is not impossible for people who have high credit utilization rates to still have good credit scores, just as long as the other factors are all good– but it’s definitely not something that typically happens.
Question: When was the last time you even Checked your Credit Score?
If it’s been a while, it’s probably time to catch up. Nationwide Credit Clearing is the home of the free credit report and consultation. Not only will we provide you with an accurate view of where you stand as far as credit worthiness, but we can then help you by taking the existing derogatory items, late payments, etc.. and helping to remove them from your credit altogether.
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