Understanding credit utilization
One major factor in maintaining a good credit score is by keeping your credit utilization below 30% . Credit utilization has a big influence on your credit scores. It's important to know about credit utilization and how to manage it for the best rating and the benefits it comes with.
Your credit scores are made up of 5 major factors:
*Payment History ( 35% )
*Level of debt/credit utilization ( 30% )
*The age of credit ( 15% )
*Mix of credit ( 10% )
*Credit inquiries ( 10% )
Credit cards can be a great way to build a credit record. The benefit can be helping you build and maintain a payment history as well as a credit score. Although if you are keeping a high utilization usage this can keep you with a lower score. Not only will keeping a high utilization keep you with a low score but this will affect you with paying a higher interest rate.
How do I get my credit utilization you ask. Here's how to calculate your utilization. Divide your credit card balance by your credit limit then multiply by 100. Remember the lower the utilization the better.
Your credit card information is calculated at each billing cycle which means every month you have a due date then you have a statement date. The balance that is on your statement date is what gets reported to the credit bureau. Information is reported according to billing cycles never in real time. If you make habit of paying credit cards late the lender can lower your credit limit.
Your credit utilization is calculated in two ways to determine your fico score. Your utilization is calculated on each card separately and then your total overall of all your credit card balances compared to your credit limits on each card. If you have a high credit utilization in either this will affect your score.
Another type of credit score calculating system is better known as the VantageScore. Credit utilization is a significate factor in this calculation. Fico score assigns percentage to each category and vantage score does not. Vantage score lists a combination of credit utilization , balances, and available credit and are the top factor in this scoring model.
Why is maxing out my credit card limit bad?
Having high balances and maxing out credit cards will hurt when lenders are looking at you for possible loans or better credit cards. Keeping high balances alerts lenders to look at you as if you cant afford the credit they are giving you and can red flag you in cases of buying a home or car or even trying to refinance.
Tips on managing credit utilization
Keep your balances low by fanning out the usage on each card. If you run into a financial situation and absolutely need to use your credit cards don't run up the balance on one card so you can keep the utilization low.
When possible make an extra payment on your cards. Set up alerts on your cards such as when your reaching a certain limit on balances on your card. Making a double payment when possible even $10.00 can help the utilization on your balance before your statement closes. Remember the closing balance on your statement is what reports to the bureaus. You wanna make a payment or any extra payments by your due date.
Another way to get your utilization stabile is by asking your credit lenders for credit line increases. This is another important factor of why keeping your credit utilization low is good. If your lenders always see a high balance they may deny you for an increase seeing you as a risk.