Credit utilization defines the amount of credit currently in use compared to the total credit available. It is one of the essential elements used to figure out someone’s credit score. It plays a significant role in determining if a person is eligible for additional loans or other forms of credit.
Credit repair services in Houston can help people who have issues with their credit. They know how you get judgments off your credit report and how long hard inquiries stay on your credit report—they can also provide expert assistance when it comes to maximizing your credit utilization ratio.
Why Is Credit Utilization So Important?
Credit utilization ratios are one of the primary factors that affect an individual’s credit score. A low credit utilization ratio indicates good credit management, while a high credit utilization ratio can indicate to lenders that an individual is weighed down with debt, which in turn can negatively impact a person’s creditworthiness.
Credit utilization is the ratio of the amount of credit a person currently has outstanding compared to the total amount of credit that is available to them. This ratio is expressed as a percentage.
To calculate credit utilization, add up all of an individual’s credit account balances and divide that number by the sum of their credit limits. The resulting percentage is the individual’s credit utilization ratio. For example, a person with a credit limit of $10,000 that has used $5,000 of that credit limit would have a credit utilization ratio of 50%.
There are two types of credit utilization ratios that are typically used to calculate an individual’s credit score. The first type is the overall credit utilization ratio, which factors in all of the individual’s credit accounts. The second type is the per-card credit utilization ratio, which looks at the credit utilization of each credit account individually.
How to Improve Credit Utilization
Here are several ways you can improve your credit utilization rates:
Pay Balances on Time
Paying the amounts due on your loans is the most effective way to improve your credit utilization ratio. Late payments can lead to penalties and fees, and can have a detrimental effect on your credit score. It is important to make all payments on time to avoid additional charges and to maintain a good credit utilization ratio. A history of late payments can stay on your credit report for up to seven years.
Use Credit Cards Sensibly
Responsible credit card use is viewed favorably by lenders; it is strongly recommended that you keep your balances low. Using the maximum credit available can lead to a high credit utilization ratio. It is also a good idea to increase your credit limit where possible. If you have a credit card with a $5,000 limit and a $3,500 balance, your credit utilization ratio would be 70%. However, if you increase your credit limit to $10,000, your ratio would drop to 35%.
Make Large Repayment Amounts
Paying only the minimum amount required each month can lead to a higher balance on your credit accounts. It is better to pay as much as you can each month to reduce the balance and lower your credit utilization ratio.
Summing It Up
The credit utilization ratio plays a critical role in determining your credit score. It is advisable to maintain a credit utilization ratio of 30% or less to maintain a good credit score. Follow the steps laid out in this article to maintain a positive credit utilization ratio and benefit from favorable credit conditions in the future!