Credit utilization is defined to be the ratio of outstanding credit card balance to credit card limits. It gauges the amount of credit in use. It takes care of the amount of credit limit you are using. Let’s assume that if your balance was 3 whereas your credit limit was 10, then the credit limit was 30%. This is the exact way of estimating it.
If an additional of 50 is done on the card and card limit is 100, then the credit utilization rate will be about 50%.
To clearly understand your credit limit, it’s important to divide your credit card balance by your credit limit, and multiply by 100. Lower your credit limit, better it is. A low rate shows that you’re using a tiny chunk of the credit sanctioned to you.
5 Major Influences on Your Credit Score
- Payment history
- Level of debt/credit utilization
- Age of credit
- Mix of credit
- Credit inquiries
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How does the Credit Factor affect your Credit Score?
The credit utilization factor can be divided into two parts. The credit score is evaluated differently for credit cards. Then looks at the overall credit utilization which is a total of all credit card balances to the credit card balances. A high credit utilization in either category can impact your score.
Typically, the balances for every month must not charge you anything at all (avoid finance charges) so that you don’t have to pay what you do not owe. Also, it will be not being realistic to make full payments as it could be counted as a bad effort to lower credit utilization rate. The balance amount will reflect in the billing statement. The only solution to have a low credit utilization rate is not use the credit card at all. You can also make a pre-payment to save the balance in your card.
Whenever your scores look bad, its best to pay down balances in order to push upwards. Get loan approved at the best rates for further impact on the credit scores.
A high utilization rate is symbolic of your financial distress and that further lending is doubtful. This obviously affects your credit rating and also devoid you of additional credit.
If your high balance-to-limit ratio is reflecting already, then your card health is going well! All negatives can be considerably be traded off against a low overall utilization rate. Which is why we recommending requesting for closure of cards not in use anymore. This will further accelerate your credit scores.