What is credit utilization?
Credit utilization is the amount of available credit you are using. Banks and other financial companies utilize this to see if you’re an excellent candidate for a new loan.
Why is it important?
Companies that provide loans want to ensure you’ll be able to repay, so they have been always trying to see if their borrowers are financially responsible. If indeed they see you are using a whole lot of your available credit, it makes them think you might not be as responsible as you could be. We all know, it’s sort of arbitrary, nonetheless it is among the most significant factors in deciding if you are a good candidate for a loan.
How do you calculate it?
This is often a pretty simple number to find with just a little math. First, look at your newest credit card statement to observe how much you owe and how much your credit limit is. Divide what you owe by what your limit is and also you get your credit utilization rate. If you do that for all your available credit cards and personal loans, you’ll find your total utilization rate.
When you have two credit cards, add together just how much you borrowed from altogether across both and divide by your combined credit limit. If you owe $1,000 on one card and $1,000 on another, that’s $2,000. If the first card includes a credit limit of $3,000 and the other has a limit of $7,000. Your overall credit utilization is 20% or $2,000 divided by $10,000.
How will you know whether or not it’s is too high?
It’s an excellent principle to keep your total credit usage under 30%. Ideally, your credit usage is under 30% for each of your cards or lines of credit, too.
How will you improve your credit utilization?
There are numerous approaches to enhance the amount of credit you use, however it precipitates to variations on two ideas: reduce your debt, or raise your credit limits. Either one will help improve the calculations. Some specific approaches to reduce your credit utilization:
- Pay down debt on accounts with high usage – Perhaps you just never knew about this 30% rule, or you’re using certainly one of your cards more than the others. Give all your cards some love! Plus, paying down those accounts will also help your overall credit usage.
- Ask for a credit limit increase on all your credit card accounts –You’d be amazed at what a phone call to your creditors could possibly get you quickly and automatically. Be sure that you ask if they’re carrying out a soft or hard credit check to increase your limit, because it could impact your credit score. Learn more about soft versus hard credit inquiries.
- Get yourself a pre-paid (secured) credit card – This really is one good way to put in a new line of credit and usually has a lower potential for you being denied. Getting a secured credit card from a bank or credit union is a good way to increase your credit line quickly.
- Apply for a credit builder loan – This is a small loan you can get through banks or credit unions which often includes a short repayment schedule. You usually repay the loan in a couple of years.
- Apply with a co-borrower – If you don’t think you may get a new line of credit by yourself, go in with another individual who has better credit. Their higher credit score or better credit profile could help you overcome the finish line.
- Become an authorized user on another person’s credit card – If you are an authorized user, you have access to that card’s credit limit, that might raise your overall credit. Make sure your trusted partner, friend or family member hasn’t used an excessive amount of credit on that card. That would defeat the purpose!