What is a credit card utilization rate, and what is a good ratio?
Most Americans currently have a credit card or have had one in the past. How you use your credit card will make or break your credit. By maxing out your credit cards and not making payments on time, or only paying the minimum monthly payments can spell disaster for your credit score. When determining your credit score, one of the highest rated considerations is credit card utilization. What exactly is a credit card utilization rate, what is a good ratio, and what can you do to improve your credit through credit card utilization? Read on for all the details.
What is credit card utilization ratio?
Whether you have one credit card or multiple credit cards, your utilization ratio will be sure to show up on your credit. This ratio is calculated by the amount you owe on your card compared to the spending limit for that specific card. Here is an example:
Say you have a credit card that has a limit of $1000. In a given month you spend $500, which carries over to the next month. Your credit card utilization ratio would be 50%. Simply divide the balance by the credit limit and you will have your ratio.
It is important to note, that when it comes to credit card utilization reporting, your per-card and overall utilization are both looked at to evaluate your credit score. Per-card simply means the utilization ratio for each separate credit card that you hold in your name. The overall credit card utilization (also known as aggregate) will look at all of your credit cards to determine your total credit limit and total amount owed. Both of these ratios will play an important role in determining your credit score.
What is a good ratio?
It is advised that you do not max out your credit cards and only pay back the minimum monthly amount. Instead, credit reporting companies look for a credit card utilization ratio of 35% or less. In fact the lower the ratio, the better. There are several people who have a credit card available in case an emergency arises, which is smart. In the meantime, you can keep a low credit card utilization ratio by using your credit card to make a monthly bill payment, such as a utility bill. This is usually a lower amount and can be paid back in full every month. Resist the urge to do impulse shopping with your credit card and stay focused on how using your credit card the right way will help boost your credit score.
What can you do to improve your credit through credit card utilization?
Your credit report is constantly being updated month to month, based on several factors regarding your finances. Make sure to keep your spending to a minimum, while paying back the full balance each month. This is especially true when it comes to credit cards that might have low spending limits. It can also benefit you to make two payments every month if you are having trouble coming up with the full amount on the exact due date. Doing this will ensure the full balance is paid off, adding to the positive credit card utilization ratio which will be reported for your overall credit score.
Now that you know what credit card utilization is and how it can positively or negatively impact your credit score, be sure to keep an eye on this for the future. Making small adjustments to your credit card spending each month can be the difference between a fair credit score and good credit score.