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Paying your bills on time is not the only way to maintain a good credit score. Controlling your credit utilization and ensuring it stays low is another excellent way to improve your credit score.
In a FICO score or VantageScore, you’ll need to keep your credit utilization under 30% to maintain a good credit score.
Essentially, your credit utilization rate compares how much you owe on your credit cards to your total credit limit. This rate shows up as a percentage and significantly impacts your credit score.
To calculate your credit utilization rate, you’ll need to do the following:
For example, let’s say you own two credit cards with a total credit limit of $10,000. One card carries a balance of $5,000, making your credit utilization rate 50%. The rate represents you using half of your available credit.
On the other hand, a lower credit utilization rate means you use less of your available credit. In addition, it shows that you’re managing your credit accounts well by not overextending your finances. Lowering your credit utilization rate can boost your credit score by 30%.
It is also essential to keep individual credit card utilization rates low. For example, if you have two credit cards, it is better to have one card carry $3,000 and the other carries $2,000 than one having $5,000. Your overall credit utilization rate still will be 50%; however, one card will have a 60% rate while the other has a 40% rate.
Your credit card utilization rate plays a significant role in your credit score. The lower your rate is, the higher your score will be. On the other hand, the higher your utilization, the lower your score. To maintain a healthy credit score, you’ll need to keep your expenses in check and avoid having high balances. In addition, the total number of opened credit accounts and your credit history will also matter.
For example, using only one of many cards to make purchases can adversely affect your credit score, especially if you have a short credit history. Alternatively, spreading your expenses across multiple cards with excellent credit history can improve your credit score.
If you want to reduce your credit utilization rate to boost your credit score, try the following steps:
Maintaining a low credit utilization rate while paying off your monthly balances is best. Accomplishing these tasks will drastically improve your credit score while allowing you to enjoy your credit card’s reward program.