Today, your credit card offers you the opportunity to take timely credit through a solid credit score. However, if you have a high credit utilization rate for your credit card, you might also have a comparatively low credit score.
You might also have a challenging time making timely monthly payments, leading to a higher interest rate on delayed payments. Credit utilization holds a significant impact on your credit score, and it is vital to handle it better to get a high credit rating and the advantages that come with it.
Understanding your Credit Utilization Rate
Credit utilization rate refers to the ratio of your unpaid credit card balances to your credit card limitations. It estimates the amount of available credit you are employing.
To compute your credit utilization ratio, you must divide the balance of your credit card by your credit limit and then multiply the sum by 100—the lower your credit utilization ratio, the better. A low credit card utilization rate indicates that you are only employing a small portion of your given credit limit.
In addition, some of the top factors that affect your credit score are as follows:
- Payment History
- Level of Debt/Credit Utilization
- The Age of Credit
- A Mix of Credit
- New Credit
How Does Credit Utilization Rate Affect Your Credit Score?
Your credit utilization rate tells lenders whether or not they can trust you. A higher rate implies that the person regularly goes over their credit limit, meaning they might have difficulty repaying it.
There are several types of credit-scoring models, but here’s an example to help you understand. The FICO (Fair Isaac Corporation) scoring standard looks at your credit utilization in two parts. Initially, it calculates the credit utilization of all your credit cards separately. Next, it estimates your general credit utilization, that is, the sum of all your credit card proportions compared to your credit limits. A high credit utilization in either type can damage your credit score.
Some Tips to Manage Your Credit Score
To better manage your credit utilization ratio, especially if you use your credit card excessively every month, you must set credit balance alerts that provide notifications if you exceed your credit limit. Besides checking your credit balances, you can follow the steps below:
1. Make Timely Payments for your Credit Cards
Making timely payments for your credit card is the best way to ensure a low credit utilization rate. Also, you must make sure that your balance remains low by your account statement closing date. For this, you can check the latest copy of your billing report to measure your subsequent account statement ending date.
This way, you can keep your credit card monthly payment limit below the 30% threshold.
2. Request your Creditor to Increase your Credit Limit
If you use your credit cards excessively, the best tip is to ask your creditor to increase your credit card limit. As soon as you lower your credit card balances or increase your credit card limits, your credit utilization ratio will reduce, and your credit score will increase.
If you’d like to know more about your credit utilization rate and how to manage your credit, reach out to Briteside Solutions. We’re focused on making sure every single one of our clients get the financial education they need to make smart decisions, so get in touch today.