Revolving utilization is an important factor that can affect your credit score. This is often the main reason why your credit score changes from month to month. However, usage can be confusing, so let’s break them down here and help you use them to your advantage.
If you’ve seen the FICO score formula, debt is one of the most important factors affecting credit scores (second only to payment history), and usage is an important part of that calculation.
What is a good revolving usage rate?
Revolving utilization (also called debt utilization or debt utilization) looks at the balances on your revolving accounts, primarily credit cards, and compares them to your available balance. However, it is not necessarily a representation of your debt as this factor can affect your credit score even if you pay off your balances in full each month. (More on that in a moment.)
Revolving utilization 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: $1000
Utilization = 35%
To arrive at this formula, simply divide your balance by the credit limit and shift the decimals two places to the right. In our example:
350 divided by 1000 = 0.35
Shift the decimal point two places to the right to get 35%.
You may have seen articles that call 20%, 25%, or even 30% or less a good utilization percentage, but the real answer is “it depends.” There are many different scoring models that take into account all the information in your credit profile. An acceptable load for one person may be a little too high for another.
Utilization per card vs. total utilization
Credit card utilization is calculated both on individual revolving credit accounts and on all revolving accounts. Most credit scoring models compare total revolving balances to total credit available. That means total credit utilization is important.
Just as one rotten piece of fruit can spoil the whole batch, a card with high utilization can cause this factor to hurt your credit score. This article, A Little-Known Trick That Can Boost Your Credit This Month, provides a real-world example of how this happens.
If you have a card with a much higher utilization rate than others, and your primary goal is to build or maintain strong credit scores, you should focus on paying off that card with a large balance first before paying extra for others.
On the other hand, if this factor doesn’t affect your credit score, don’t worry about it. Checking your credit will usually tell you the main factors affecting your results, and if utilization or credit aren’t on the list, you may not need to take any action.
It’s a good idea to check and monitor your credit reports and scores with all three major credit bureaus: Equifax, Experian, and Transunion. Read: 138+ Places to Check Your Free Credit Score
5 ways to improve your loan utilization rate
It is important to remember 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. This date is listed on your credit card statement. You will soon understand why this is important.
Also remember that the type of loan matters here. Installment loans (like a car loan or mortgage) don’t calculate the drawdown 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 in mind, here are six strategies to improve your loan utilization rate:
- pay off credit card debt. Paying off revolving debt and keeping it low is a great way to improve utilization. It can also be a quick way to improve your credit score if using debt is lowering it.
- Request a credit limit increase. A higher credit limit can improve the utilization of an individual account and contribute to a higher overall credit limit. Most credit scoring models don’t care that much about whether you have “too much credit available,” although VantageScore does assess that factor.
- Open a new credit card. Use a new card balance transfer to settle a credit card with a higher balance. If you receive a low-interest credit transfer, you can also save interest.
- Refinance credit cards with a personal loan. As mentioned, usage mainly affects credit card accounts. A personal loan is typically classified as an installment account, so it can be beneficial to use one to pay off credit cards. (However, there is no guarantee.)
- Pay earlier. Remember when we mentioned that most credit card issuers report at the end of the billing cycle? This means that if you pay your card around the due date, that month’s payment will arrive too late to reduce the reported balance. Instead, you might want to pay online for several days In front at the end of the accounting period to reduce the reported balance.
- Use a business credit card for business financing. Many small business credit cards don’t sign up with personal credit unless you don’t pay the debt. This means that the balances you carry on these cards do not affect your personal credit rating, although they may affect some business credit ratings.
How opening a business credit card can help your revolving usage
Let’s expand on the last item in this list of options. Many small business credit cards do not show up on the cardholder’s personal credit reports unless the debt is paid on time. Some never report personal credit.
However, most small business credit cards require a personal credit check and personal guarantee. Here’s a chart that describes how business credit cards fit with personal loans.
In case you’re wondering, some business credit scores also assess utilization, but not all do. In addition, business credit reports generally do not include credit limits. Instead, a current high account balance is often used as a proxy.
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