What You Should Know About Credit Utilization

What You Should Know About Credit Utilization

Among the many variables that go into the calculation of a credit score, credit utilization is perhaps one of the lesser known ones. It is, however important and can end up messing with your score in a big way.

Worse still, some go for an unlimited card, which should be avoided as much as possible, unless of course if your resources are virtually bottomless.

What is credit utilization?

The simplest way to explain the concept is that it is the amount you owe on a card against your credit line. So if you have an outstanding balance on your card that comes up to $5,000 and the limit on that card is $20,000, your credit utilization will be 5000/20000?100 = 25 or 25%.

If you have multiple cards, the values will be added up and they will go through the same calculation. So if your second card has a balance of $2,000 on a $20,000 limit it will amount to both balances added: $7,000 both limits added: $40,000 which will be 17.5%. If you have more cards, it works the same way.

Effect on credit score

Credit utilization ratios can heavily influence your credit score because about 30% of your score depends directly on the amount of money you owe.

If you have one or more of your cards constantly at its maximum level, it will make it seem like you are having a tough time keeping your credit levels in check. In cases like this, your credit utilization can make your score dip dramatically.

Any credit repair agent will tell you that the optimum level on both the individual as well as combined percentage points should be at or less than 30% at all times. When the level is low, it will actually help boost your score. That is how it works, it either boosts or shoots down the score, there is neutral action.

Always be aware

There are a number of things that you need to watch out for every month apart from paying every bill. Keep a close watch on your credit utilization, even make rough calculations if you have to know constantly where you are at. The main reason for this is because every credit card issuer and bank make their reports and send in data on a monthly basis to the bureau.

The information sent will go into your credit score calculation every month. If by chance your payment schedule is off by a few days or weeks, your payments may be on time, but your credit utilization ratio will still be high. While it is not possible to know exactly when this reporting happens, one way to stay on the safe side is to make payments more than once a month, especially right after a huge purchase.

If you have some spare cash, but bought a TV on your card, for example, make a payment to the card issuer, it will help keep your ratio down.

It goes without saying that credit is good for you. It teaches you to manage your money well and also makes you come off as a responsible and trustworthy person as far as money goes in the eyes of banks.

You may not need it now, but there will be a point of time in your life when mortgages, loans and other large expenses will need to be made and a good credit score will help you out. If you are having trouble with your scores, contact one of the?top credit repair companies and they can help your make changes and boost your score.

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