What should my credit utilization rate be?

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SAN JOSE, Calif.–(BUSINESS WIRE)–How much do you owe is a major factor in determining your FICO® scores, accounting for 30% of the total calculation. One of the things that FICO considers in this factor is your credit utilization rate.

Your credit utilization rate provides insight into how well you manage your credit card debt. While it’s a good idea to avoid using too much of your available credit, it also doesn’t help if you don’t use any at all.

If you’re trying to understand how your credit cards impact your FICO® scores, here’s what you need to know, from myFICO.

For more information on loans and credit, visit the myFICO blog at https://www.myfico.com/credit-education/blog

What is the credit utilization ratio and why is it important?

Your credit utilization rate is the percentage of available credit that you use on a given credit card account, as well as on all of your credit cards.

For example, suppose you have three credit cards:

  • Card A has a credit limit of $5,000 and a balance of $1,000.

  • Card B has a limit of $10,000 and a balance of $4,000.

  • Card C has a limit of $1,000 and a balance of $750.

To get your usage rate for each card, divide the balance by the Credit limitand you will get 20% for card A, 40% for card B and 75% for card C.

To get your overall credit utilization ratio, you’ll add up the three balances and credit limits, then run the same equation. This would give you a total utilization rate of around 36%.

Your credit utilization ratio is important because it gives creditors insight into how you manage your finances. Credit cards are usually used for day-to-day expenses, and if you regularly max out your credit cards or get close to it, it could be a sign that you’re struggling to manage your money without using debt.

This could cause problems if you open a new credit account and don’t have the funds to meet all of your financial obligations.

So the more credit you have available at any given time, the more likely you are to miss a payment, which results in a lower FICO® score.

What should my target credit utilization ratio be?

Some financial experts recommend keeping your credit utilization ratio below 30%. However, the data does not support the implication that your credit score will drop once your utilization rate crosses the 30% threshold.

Like all other factors in your FICO® score, the impact of your credit utilization ratio on your score will vary depending on a number of factors.

That said, generally, the lower your ratio, the better. As a general rule, keeping it below 10% (and consistently paying bills on time) can help you establish and maintain a good FICO® score.

However, you must be careful to have a utilization rate of 0%. In effect, this means that you don’t use your credit cards at all, which gives FICO less information about how you manage your money. While a 0% utilization rate will not cause your FICO® scores to drop significantly, it may prevent you from reaching maximum points for the Amounts Due score ingredient.

How to lower your credit utilization rate

Your credit utilization rate is determined by two things: your reported credit card balances and your available credit. Keeping the first low and the second high is key to maintaining a low ratio. Here are some quick tips to achieve this goal:

  • Avoid overspending: Avoid overusing your credit cards, especially if you have trouble spending too much or have cards with low credit limits. Even a $200 balance on a card with a $300 limit (eg, 66% usage) could negatively impact your FICO® scores.
  • Keep your old credit cards: Closing a credit card takes away their available credit, which could increase your overall credit utilization ratio. Therefore, it’s best to avoid closing credit cards unless you risk overspending and going into debt on your credit card or there are annual fees or a security deposit, and you no longer use the card.
  • Make your payments strategically: Credit card companies typically report card balances to credit reporting agencies based on your balance each month at the close of your statement. Making a payment before this date could reduce your utilization rate enough to keep it at a satisfactory level. Alternatively, you can make multiple payments throughout the month to keep it low at all times.
  • Make paying off credit card debt a priority: If your credit utilization ratio is chronically high because you have a lot of credit card debt, plan to pay off your balances as soon as possible. Paying off your balances can not only benefit your FICO® scores by reducing your utilization rate, but it can also have a positive impact on your budget and overall financial health.

The essential

Your credit utilization ratio is an important factor in your FICO® scores, so it’s crucial that you know where you stand and take steps to maintain a low ratio each month.

Depending on your situation, this may take time, but the good news is that as soon as you lower your ratio, your FICO® scores will react accordingly – you won’t see lingering negative effects like you would with payment delays and other negatives.

If you are unsure of your utilization rate, sign up for a credit monitoring service and track your position. If you want to lower your ratio, start taking steps now to reduce your credit card debt and keep it low in the future.

About myFICO

myFICO makes it easy to understand your credit with FICO® Scores, credit reports and alerts from all 3 bureaus. myFICO is the consumer division of FICO – get your FICO scores from the people who do FICO scores. For more information, visit https://www.myfico.com/credit-education.

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