Q&A Articles

What is Credit Utilization (And Does it Matter?)

When it comes to establishing and maintaining a good credit history, one term you’ll hear frequently is credit utilization. But what exactly does that mean, and why is it important? Let’s take a look at what it is and what it means for you.

What is Credit Utilization?   a credit report includes credit utilization information

When calculating a credit score, the credit bureaus take five factors into account. One of them is credit utilization, which is the ratio of current credit card balances to credit limits. For example, if you have a have a card with a $1,000 limit and your outstanding balance is $500, your credit utilization on that card is 50%.

Why is it Important?

Your credit utilization rate makes up 30% of your credit score, second only to your payment history. The lower your rate, the higher your credit score will be and the more options you will have. Creditors are wary of extending additional credit to consumers who are at or over-limit on their credit cards. Ideally, your utilization should stay around 30% or less.

What Other Factors Make up a Credit Score?

A credit score is a mix of:

  • Payment history (35%)
  • Credit utilization / level of debt (30%)
  • Credit age (15%)
  • Mix of credit (10%)
  • Credit inquiries (applying for new credit) (10%)

How Can I Improve It?

Ideally, you should shoot for paying credit card balances in full every month to keep your credit usage low. Of course, we know that’s not always possible. At the very least, do your best to avoid running cards up to their limit. If you have one or more cards currently at or near their credit limit, stop charging and start paying as much as you can each month. Make it your goal to get your credit utilization down to 30% or less.

If you need help managing your credit card debt, we can help. Take our online financial review to see where you stand financially. You’ll receive a personalized budget, action plan and a recommended solution for getting out of debt. Or call one of our certified counselors, who will offer guidance and support as they walk you through the process.

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