Thursday, June 30, 2016

Credit Utilization

Do you know what your credit utilization percentage is?

Easiest way to explain credit utilization is the balance owed as a percentage of available credit limit on all open cards. For example, total credit limit it $10,000 and you owe $5,000 - your credit utilization is 50%. So, why are we concerned about that percentage? What does it mean?

Your credit utilization percentage is one of the easiest way to increase or decrease your credit score. The higher your utilization, the lower your credit score. The lower your credit utilization, the higher your credit score. The reason for this is the higher your score, the higher the likelihood you will max out your available credit. That means you will use all the available credit. This is not good as far as your credit score is concerned.

To improve your credit score using utilization, you first have to know what your utilization is. Once you know that figure you can then start to pay down each debt. The method of pay down is up to you. In the past I have paid down my credit card with the highest utilization first. Back when I had tons of credit card debt, I had cards with utilization 90% and more. (please never, ever do this) The faster you are able to pay down debt and bring down your utilization, the faster your score will increase. Credit Karma is my website of choice. I monitor my credit on a monthly basis.

In a perfect world, credit utilization wouldn't really matter because the balance would be paid in full each month. However, we are not in a perfect world and life happens. If your credit utilization is above 50%, the goal should be to bring it down to 30% . Once you have achieved that goal then it should be brought down to below 10%.

Please calculate your credit utilization and work on paying down your debt.