Credit utilization is one of the most important factors in determining your credit score. For lenders, how you utilize credit can be a good indicator of how well you manage any loan they give you. Let’s take a closer look at credit utilization and how it impacts your credit.
Credit Utilization Defined
Credit utilization is the amount of credit you use compared to the amount available. For example, if you have $1,000 in credit available and have a balance of $100, then your credit utilization is 10 percent.
Credit Score Impact
Your credit score is determined in part by your credit utilization. Generally speaking, the lower your credit utilization, the higher your credit score. However, if you have late payments and other negative marks while also having low credit utilization your score may still be low. That’s why it’s important to remember that credit utilization is just one of many factors that impact your credit score.
Generally speaking, a credit utilization ratio below 20% is ideal. Anything above 20% and your credit score will begin to be negatively impacted. On the flipside, if you have a credit utilization ratio that’s too low—0% or 1%, this could also negatively impact your credit score. Lenders want to work with borrowers who are responsible, but they make their money only when you use the credit line. So failing to keep your credit accounts active with a decent credit utilization ratio could negatively impact your credit score and ability to get loans.
Keeping a Balance
It’s important to note that having a decent credit utilization ratio doesn’t mean that you should keep a balance. If you can, it’s always in your interest to pay off your balance in full each month. However, you can do this after the lender has reported your balance to the credit bureaus. Typically, lenders report to the credit bureaus at the end of your billing cycle.
Since credit utilization is something you control, you can use it as a powerful tool to improve your credit score.