Credit utilization is a vital element in building your credit scores, with experts suggesting keeping credit card balances under 30% of their limits.
Your credit utilization is calculated by adding all of your card balances together and dividing by their respective card limits, then multiplying this number by 100 to obtain your overall utilization rate.
Paying Off Your Debts
Payment history accounts for 35 percent of your credit score and should remain on time and within your limit to maintain high scores. To increase this score, be mindful when setting payments aside or exceeding credit limits.
Credit Utilization accounts for 30 percent of your score and measures how much of the debt you owe compared to your total credit limit. It is calculated by adding together all your card limits and then multiplying this figure by their balances.
Improve your credit utilization by paying down debts or requesting higher limits from card issuers. While their effects might take two or three credit statement cycles to take effect, be patient as you strive to reduce credit card balances; having no balance on one card would be fantastic, while reaching $0 across all cards would be even better!
Increasing Your Credit Limits
Credit utilization ratio is an integral component of most credit scoring models, and if your scores have become too low you can increase them by asking your card issuer to increase the maximum credit limit on your card – this will lower the credit utilization ratio as long as it can be managed responsibly.
Your credit score will improve as the utilization ratio and individual card utilization ratios decrease, but be careful not to accumulate too much debt on any revolving accounts – credit card balances and limits are calculated separately when determining your score.
Damage caused by overutilization tends to be temporary, as credit bureaus gain new insight into your balances and limits with every billing cycle. As long as you pay down your balances and keep credit utilization below 30%, your scores should begin improving quickly.
Keeping Cards Open
Credit scoring models rely on card utilization to gauge whether a borrower is responsible, so keeping cards open helps lenders see this. Closing cards you no longer use could reduce available credit considerably if doing so reduces one account with an advantageous credit limit drastically.
While lowering your utilization to zero is the ideal goal, this may not always be realistic when building short credit histories. To minimize utilization, focus on paying down balances each billing cycle prior to their due dates and keep all cards open.
Remember that while VantageScore and FICO score models only consider revolving credit when calculating your score, some versions may also consider closed accounts with balances or home equity lines of credit as part of your calculation. Closing these accounts could negatively affect credit utilization; closing may instead be better as these loans won’t affect it directly.
Getting a Free Credit Score
Credit utilization accounts for roughly 30% of your score, so keeping card balances as low as possible, even if there’s enough funds available, is critical for maintaining good credit.
To do this, Experian offers a free credit score monitoring service that updates your score every month (or sooner), giving an overview of each card account in your report and their utilization rates. Furthermore, you can monitor individual revolving accounts to get more specific data.
One effective strategy to reduce utilization is asking your card issuer for higher limits on one or more cards, thus decreasing utilization rates. For optimal results, make this request before your statement closing date (usually around the 15th each month) so as to avoid your score taking a significant hit from being reported back to credit bureaus.