Revolving utilization is a major factor that can affect your credit scores. It is often the main reason your credit scores change from month to month. But utilization can be confusing, so we’re going to break it down here and help you use it to your advantage.
If you’ve seen the FICO score formula, debt is one of the biggest factors affecting credit scores (second only to payment history), and utilization is a big part of that calculation.
What is a good turnover utilization rate?
Revolving utilization (also known as debt utilization or debt utilization) looks at the balances on your revolving accounts, primarily credit cards, and compares them to your available credit. However, it is not necessarily a representation of your debt, because this factor can affect your credit scores even if you pay your balances in full each month. (More on that in a moment.)
Revolving usage compares the balance on each of your credit cards to your credit limit. Here is a simple example:
Credit card balance: $350
Credit card limit: $1,000
Utilization = 35%
To arrive at this formula, simply divide your balance by your credit limit and move the decimal two spaces to the right. In our example:
350 divided by 1000 = .35
Move the decimal point two spaces to the right to get 35%
You may have seen articles refer to 20, 25, or even 30% or less as good utilization rates, but the real answer is “it depends.” There are many different scoring models and they will take into account all the information in your credit profile. An acceptable utilization rate for one person may be too high for another.
However, for most people, a low credit utilization ratio means keeping balances below 20-25% of available credit. Generally, a utilization ratio in that range will contribute to a good credit rating.
Usage per card vs. total usage
Credit card usage is calculated on both individual revolving credit accounts and all revolving accounts added together. Most credit scoring models will compare total revolving balances to total available credit. That means that the overall utilization of credit is important.
Just as one piece of rotten fruit can cause the whole lot to go bad, a card with high utilization can cause this factor to lower your credit score. This article, A Little-Known Trick That Can Boost Your Credit Score This Month, includes a real-life example of how that happens.
If you have a card with much higher utilization than others and your primary goal is to build or maintain strong credit scores, you may want to focus on paying off that card with a high opening balance before paying more on others.
On the other hand, if this factor doesn’t lower your credit scores, don’t dwell on it. Typically, when you check your credit scores, you’ll be given the top factors that affect your scores, and if utilization or balances aren’t listed, you may not need to do anything.
It’s a good idea to check and monitor your credit reports and scores with the three major credit bureaus: Equifax, Experian, and TransUnion. Read: 138+ Places to Check Your Credit Scores for Free
5 ways to improve your credit utilization rate
It’s important to note that this factor is based on the balances and credit limits that appear on your credit reports at the time your credit score is calculated. Most credit card companies report balances monthly, around the time your credit card statement closes. That date appears on your credit card statement. You’ll understand why that’s important in a moment.
Also keep in mind that the type of credit matters here. Installment loans (such as auto loans or mortgages) do not calculate utilization in the same way. The focus here is primarily on credit cards and lines of credit. Home equity lines of credit may be included, but not always.
With that background in mind, here are six strategies to improve your credit utilization rate:
- Pay off credit card debt. Paying off revolving debt balances and keeping them low is a great way to improve utilization. It can also be a quick way to improve your credit scores if your use of debt is bringing them down.
- Request a credit limit increase. A higher credit limit can improve utilization of an individual account and contribute to a higher total credit limit. Most credit scoring models aren’t as concerned with whether you have “too much available credit,” although VantageScore assesses this factor.
- Open a new credit card. Use a balance transfer on a new card to help pay off a credit card with a higher balance. If you get a balance transfer with a low interest rate, you can also save money on interest.
- Refinance credit cards with a personal loan. As mentioned, utilization applies primarily to credit card accounts. A personal loan is generally classified as an installment account, so it can be beneficial to use one to pay off credit cards. (However, there is no guarantee).
- pay before. Remember when we mentioned that most credit card issuers report at the close of the billing cycle? That means if you pay your card close to the due date, that month’s payment will be too late to reduce your reported balance. Instead, you may want to make a multi-day payment online prior to the close of the billing cycle to help reduce the reported balance.
- Use a business credit card for business financing. Many small business credit cards are not reported as personal credit unless you default on the debt. That means any balances you carry on those cards won’t hurt your personal credit scores, though they may affect some business credit scores.
How Opening a Business Credit Card Could Help Your Revolving Use
Let’s expand on the last point on that list of options. Many small business credit cards are not included in the cardholder’s personal credit reports as long as the debt is paid on time. Some never report personal credit.
However, most small business credit cards require a personal credit check and a personal guarantee. You’ll find a chart outlining how business credit cards relate to personal credit here.
In case you were wondering, some business credit scores also assess utilization, but not all do. Also, business credit reports generally do not include credit limits. Instead, a recent high balance is often used as a proxy.
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