A good credit score has several components: payment history, amounts owed, length of credit history, new credit and credit mix all contribute to your credit score. ‘Amounts owed’ refers to how much debt you have in total (across all your credit accounts), but your total debt is not as significant as your credit utilization. However, it’s important to remember that credit utilization is one of many factors used by credit scoring models and improving it will not automatically boost your credit score. There is no quick fix when it comes to credit scores. Learn more about credit utilization and some tips on how to improve your credit score over time below.
What is Credit Utilization?
Your credit utilization ratio captures how much of your available revolving credit you’re currently using. It’s usually expressed as a percentage. To calculate your credit utilization, simply add up balances on your credit cards (the amount you owe) and then add up their credit limits (the maximum amounts you charge.) Divide the sum of your balances by the sum of your credit limits and multiply the result by 100. The result is your credit utilization ratio.
Here’s an example:
Let’s say you have three credit cards with different balances and credit limits.
- Card 1 has a balance of $3,000 and a $5,000 credit limit.
- Card 2 has a $2,000 balance and a $7,000 credit limit.
- Card 3 has a $1,000 balance against a credit limit of $3,000.
To get your aggregate credit utilization ratio, add up the balances first.
3000 + 2000 + 1000 = 6000
Now you add up the credit limits.
5000 + 7000 + 3000 = 15000
Now divide the total balance by the sum of credit limits.
6000 ÷ 15000 = 0.4
Multiply the result by 100.
0.4 x 100 = 40
Your credit utilization ratio is 40%.
Credit cards (including secured cards and closed but past-due accounts), HELOCs and personal lines of credit contribute to your credit utilization.
How Can Credit Utilization Help with Your Credit Score?
Generally, a lower credit utilization ratio means a higher credit score. Here’s how you can reduce your utilization:
- Pay down credit card debt: A chronically high balance not only attracts interest, but it also can be harmful to your credit score. Pay down your balance as soon as possible. Once you’ve paid it off, avoid making just the minimum credit card payment each month.
- Avoid closing any credit accounts: Closing a credit card or personal line of credit will lower your total available credit. It’s best to close your credit card only if it carries a high annual fee or puts you at a significant risk of overspending.
- Avoid maxing out your credit cards: Using your entire credit limit makes your credit utilization too high, especially if you’re not intending to repay the amount within the statement cycle.
Disclaimer: This content is sponsored by myFICO and is provided for informational purposes only. The information shared here is not intended to serve as financial, legal, or credit-related advice. Readers are encouraged to consult with their personal financial advisors or credit professionals to assess their specific situation. To learn more about myFICO’s services, including credit scores and monitoring tools, please visit the myFICO website or reach out to a myFICO representative.
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