So, you’ve been paying attention to your credit scores, and you understand the payment history, age of accounts, and other stuff, but do you know what the Credit Utilization score on your credit report means? Credit utilization is exactly what it sounds like, it’s how much of your available credit that you are currently using. You can calculate your credit utilization by taking the total amount of credit that you have available on all of your credit cards and dividing it by the balance owed on all of the cards.
For example, let’s say you have a credit card with a $1,000.00 credit limit, but you’re carrying a balance of $600.00 on the card – that means you’re using 60% of the total available credit that you have with that credit card provider, which may not seem too bad to you, but to a potential lender, it means you’re using the majority of your available credit. If your credit cards are maxed out, you’re using 100% of your available credit, also not a good thing.
Typically, you want to use 30% or less of your total available credit at any given time, and if at all possible, you want to break that down even further and use only 30% of your total available credit on any individual account, as well. (Unbelievably, some creditors and credit bureaus also look at individual credit cards now, too!) Using more than 30% of your available credit actually brings your credit score down a few points to a lot of points because your credit utilization score accounts for 30% of your total credit score.
So what can you do to better your credit utilization score? Ideally, you should pay off all of your credit cards every month, but in the event that you can’t, you might want to consider getting another credit card to increase your available credit – that credit card can be a balance transfer card, a regular credit card, or even a catalog shopping card (like a Fingerhut Credit Account), just as long as you don’t go overboard when applying for new credit cards, and just as long as you don’t run up a new bill on your new credit card!
Note: Your Credit Utilization Score only includes your revolving credit accounts. Any mortgage or automobile loans are not taken into consideration.