What is Credit Utilization?

| Tedis Baboumian |

Your credit score is based on a combination of factors. One of the factors that have the most impact on your credit score is known as credit utilization. What is credit utilization? It’s the percentage of available credit that you’re using compared to the total limit of revolving credit you have. The lower your credit utilization rate is, the better.

How Credit Utilization Works

When you are approved for a revolving account such as a credit card or a revolving line of credit, lenders expect you to manage the account in a responsible manner. This means paying your payments on time and keeping your credit utilization low. To calculate this ratio, divide the amount owed by the total credit limit. Your credit utilization rate can be calculated for each of your credit cards, and it can also be calculated for all of your revolving credit added together.

How Low Should Your Credit Utilization Be?

Most credit experts recommend keeping your credit utilization ratio below 30 percent. If you start using too much of your available credit, potential lenders may see it as a sign that you’re overspending and consider you a credit risk. The best way to manage credit is to plan to pay back whatever you borrow within 30 days. If you aren’t able to pay the balance in full each month, work toward paying off the balance before you use your available credit on something else.

Improving Your Credit Utilization Rate

There are two ways to improve your credit utilization rate. The first is by paying down your outstanding balance as much as you can. Making payments more than once a month can help you work toward that. The other option is to increase the amount of your available credit by being approved for an additional credit card or requesting a credit line increase on an existing card.

If you decide to try to improve your credit utilization rate by increasing the total amount you have available to borrow, make sure you won’t be tempted to use the additional credit just because it’s there. Opening a new credit card and keeping it at a zero balance may be a good move but opening a new credit card and increasing the amount of your debt may do more harm than good.

Being Proactive About Your Credit

Having a good credit score is important for your financial future, so it’s important to be proactive about taking care of your credit. Always pay your bills on time and work toward paying down your outstanding debt. Keep an eye on your credit report and make sure the information on it is accurate. Inaccurate information on your credit report can negate the efforts you’re making to have good credit, so if you find anything that isn’t correct, open a dispute immediately.

Dovly can help you work with the credit bureaus to straighten out any inaccurate information. Dovly is an AI credit engine that can help you track, manage, and fix your credit. Try it risk-free with our free membership tier. Get in touch with Dovly today.

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