HOW DOES "CREDIT UTILIZATION" AFFECT CREDIT SCORE?

by Basak Cakici

HOW DOES "CREDIT UTILIZATION" AFFECT CREDIT SCORE?
Advice from our lender colleague, Mike Trejo of Bridgepoint Funding

Understanding this concept can help you manage your finances more effectively and maintain a healthy credit score.

What exactly is credit utilization? It's the ratio of your credit card balances to your credit limits. For example, if you have a credit card with a $5,000 limit and a balance of $1,000, your credit utilization ratio is 20%.

Negative Impact:
High credit utilization, or using a large portion of your available credit, can negatively impact your credit score. High utilization is a sign of financial strain and lending institutions may view you as a higher risk borrower. Aim to keep your credit utilization as low as possible. No more than 30% utilization is recommended, but 20% or lower is even better! This will help keep your credit score up.

Positive Impact:
Maintaining a low credit utilization ratio can positively impact your credit score. Lenders view low utilization as responsible credit management, which reflects positively on your creditworthiness. Keeping your utilization ratio low demonstrates that you can manage credit responsibly and will lead to a higher credit score over time.

Here are some tips to help you manage your credit utilization effectively:
- Pay your credit card balances in full (when possible) to keep your utilization low. If you cannot pay off in full, pay the balances down as quickly as you can and as much as possible.
- Avoid maxing out your credit cards, even if you plan to pay them off quickly.
- Consider requesting a credit limit increase to lower your utilization ratio, but be cautious not to increase your spending along with it.
- Regularly monitor your credit card balances and utilization ratio to stay on top of your financial health.