One of the most important elements of your credit score is how much of your credit you are using. This is understandably important to lenders because they do not want to lend additional money to someone who is seemingly strapped with debt. When you are using too much of your credit, a new lender would have to compete with numerous others creditors for your debt repayment dollars. In the event that you were to default, many different lenders would be jockeying for their place in line to get at your limited assets. For lenders, this is a scenario that they want to avoid.
The percentage of your available credit that you are using is called your credit utilization ratio. There are two different computations that will be made when figuring out this ratio. The first is taking the amount that you owe on each individual card and dividing it by your total credit limit on that particular card. This is the per-card credit utilization ratio. Creditors want to see if you are maxed out on any of your credit cards.
The second credit utilization test is how much of your overall revolving credit you are using. This is computed by first taking all of the available credit for which you have been approved on your credit cards and adding it together. Then, all of the credit card debt that you are using is also added together. The total debt is divided by the total amount of available credit. The final number is expressed in terms of a percentage.
In general, creditors will look at a mix of both of these measures in determining whether you are creditworthy. Lenders want to see that not only are you not using too much of your available credit, but also that you have your debt spread out between your credit accounts. They also want to make sure that you are not trying to obscure high credit usage on one card by not opening up other new accounts where you have not used any credit.
From a broad perspective, there is no magic number for credit utilization that lenders are looking for in your profile. However, there is certainly a sliding scale when it comes to how lenders view it. In other words, the less of your credit that you are using, the more favorably creditors will view you.
Of course, if you have credit cards, chances are that you are using them. Accordingly, nobody will have a zero credit utilization ratio. While there is no one magic number, lenders will usually look to see if the credit utilization is under 30 percent.
The best way to achieve a strong credit utilization is to keep your credit card balances as low as possible. Generally, this is done by paying off your balances and staying ahead of your credit card payments. You can improve your utilization by reducing your debt just a little bit every month.
The other way to improve your utilization is to have your issuers up your credit limit. They will do this if they see that you have a sound track record of making your payments every single month on time. Since credit utilization looks not at your total amount of debt but the debt in proportion to your credit limit, the more you are able to borrow, the lower your ratio will become.
Another way to improve your credit utilization is to get a new credit card and leave your old card open. This may hurt you in other respects, but at least it will improve your credit utilization. You can apply for another card in order to take advantage of credit card promotions, but there are numerous reasons to leave your old card open including the utilization and the need to keep your track record of successful payment of your credit card debt. Therefore, you should be sparing with applying for new credit in order to lower your utilization because the number of accounts is also a factor in your credit score.
One of the most effective ways to reduce your utilization is to apply for a personal loan or debt consolidation loan. This will lower your credit card debt and can also result in a lower interest rate for you which will save you money. While you still remain owing debt, personal loans are a slightly different kind of debt than having to pay multiple credit cards in a single month. A consolidation loan can make it easier for you to repay your debt and improve your credit utilization. However, there will be a slight hit to your credit because there will be a hard inquiry on your credit.
It is important to keep tabs on your credit utilization every month by checking your statements and performing your own calculations. Pay attention to how much debt you have overall and on each card. Make sure to spread out your credit card spending among multiple cards if you have them and do not put too much on any one card. At the same time, if you are able to reduce your credit card debt, try to pay down a little bit of debt on each of your cards.
When you are able to successfully manage and reduce your credit utilization, you make yourself a more attractive borrower. This will help you gain access to credit when you need it so you are not forced to make financial decisions in desperation.