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Ways to Successfully Manage Your Credit Utilization Rate

When you think of your credit score, you might not think about how it is calculated or how your activities affect it. Simply said, every credit score is built up of certain criteria, and each criterion might cause a credit score increase or reduction. Given that credit use is one of the factors that might affect your credit score, it may be time to learn how to control your credit utilization.

To properly manage your credit usage rate, you must first grasp what it is and how it might affect your life adversely or favorably.

What is credit utilization and how is it calculated?

Credit usage is a ratio that compares the amount of debt owed to the quantity of outstanding credit available. You may calculate your credit usage rate by dividing the amount of credit you utilize by the amount of credit available. The greater your credit utilization rate, so more of your available credit you utilize.

For example, if you have three credit cards, one with a $500 credit limit, one with a $200 credit limit, and one with a $300 credit limit, your total possible revolving credit is $1,000.

Your credit usage rate will be 40% if you utilize $400 of the $1,000 available credit. In contrast, if you used $100 of your available credit, your credit usage rate would be 10%.

Remember that, while your credit usage rate is based on your overall revolving credit capacity (credit cards, lines of credit), individual utilization rates will also be considered. For example, if you max out a single credit card, the account will have a 100% usage rate. Even though your total utilization rate is significantly lower, this has a negative impact on your credit score.

Why does your credit utilization rate matter?

One of the numerous things that might effect your credit score is credit use. It accounts for 30% of your FICO credit score, making it one of the most critical elements influencing your credit score. Creditors and lenders may or may not approve your application based on the number. This is because your credit usage rate is another way for creditors and lenders to assess your financial management skills.

If you have $2,000 in revolving available credit to you between one or more credit cards, you should use no and over $600 to keep your credit utilization at or below 30% if you would not want to see your credit score drop significantly - an ideal utilization rate to boost your credit score is keeping it below 10%.

 


By Author: Sam Peterson | 14 Jul 2022
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