Credit Utilization Tips

Written By:

Credit utilization is not necessarily a common term that you hear or think of when it comes to evaluating your credit score. It is a term and concept, however that you should be familiar with, because it’s an important concept. Credit experts estimate that 30 percent of your credit score calculation derives from your credit utilization level. In addition, creditors and lenders do not like to see your credit utilization level exceed 30 percent. Credit utilization is the amount of the credit line you have as a balance as compared to the total credit line you have. For these purposes, only credit cards have credit utilization figures.

Avoid Maxing Out Cards

When your credit card balances exceed 30 percent of the line amount, this puts a dent in your credit score. Your first step in managing your credit utilization is to avoid maxing out your credit cards. Only use your credit cards for charges you can pay off on a monthly basis. If you have to carry a balance, then make sure the balance doesn’t exceed 30 percent of your line amount.

Spread it Out

If you do have credit cards with balances that are more than 30 percent of your credit line, then consider spreading the balances out. Transfer some of the balance on one or more credit card to cards that have lower utilization levels. In situations where you cannot pay off the balance on your credit cards, this helps to lower your credit utilization levels. Decreasing the credit utilization levels does help to increase your credit score over time.

Pay it Off

Installment loans and mortgages do not count for credit utilization levels. That means that if you have these types of loans, the balance to line ratio is not a factor in credit utilization. This also means that it might be beneficial for you to use a mortgage or home equity line of credit to pay off and consolidate your outstanding credit card balances. Not only can this help you to save money on the interest you pay, but it can also reduce your credit utilization levels.

Several different factors go into calculating your credit score. One of these factors is your credit utilization level. Credit experts estimate that 30 percent of your credit score is calculated using the credit utilization ratio. If your credit utilization ratio exceeds 30 percent, then use these tips to decrease your level and increase your credit score. If you do not pay attention to your credit utilization levels, it can have an adverse affect on your credit score and then you’ll have to implement these tips anyway.