How To Mastering Credit Utilization Can Boost Your Credit Score Very Fast
Are you prepared to master your credit score and get the keys to the success of your finances? If, for instance, you are a person who has not found the right solution so far, you have found the right place. In today’s blog, we’re diving deep into one of the most critical factors influencing your credit score: the credit limit is the credit utilization of the applicant.
Being the experienced finance and credit repair person having more than 15 years, I always tell them that they are not for just spending, but they are your way of accumulating a good credit history and getting a good credit score. But hold up! When you are trying to get as many credits as possible, you are in for a bad situation. High credit utilization leads to lower scores, high monthly payments, and huge interest rates if you failed to pay on time.
Don’t sweat it, though! As a resident expert in finance and credit repair, I am here to help you understand how to get the best credit utilization. I am sure, it is a gem that can boost your credit rating and all the luxuries that go with it.
Which means Credit utilization is what?
Pay attention, everyone, I am going to tell you about credit utilization. This complicated phrase essentially means the ratio of the amount of your credit limit that you are using to the total credit limit available to you. Think of it like this: Think of your credit limit as your gas tank in the car and your current balance as the amount of gas you’ve used. Credit utilization is the portion of that tank which is filled up.
For instance, if you have a $1,200 credit limit and a $360 balance, it is a clear sign that you are using more than 30% of your credit limit which may have an adverse effect on your credit score. Hence, you are paying down 30% of your credit limit (360 divided by 1,200, then multiplied by 100). Easy enough, right?
Currently, if you’re paying $600 a month in new charges on a $1,200 limit, your utilization rate goes up to 50%. Not ideal. The percentage of rejections will be the lower, the fewer they will be for you.
Here’s the kicker: The credit utilization is the biggest factor that affects your credit score, and you should keep it low. We are discussing a massive 30%! This is exactly why it is necessary to be cautious of your purchases and not to get your cards used up.
At present, I won’t go too deep into it, but other elements also play a part in your score. Things like your payment history, how long you’ve had credit cards open, and even the types of credit you have are some of the factors a lender may consider. But let’s not get into that now. That will be a story of another day.
Always, keep in mind, to balance your credit utilization in a proper manner is a great way to get a good credit score. Moreover, it is essential to have a good credit score when buying a car. In this way, you will be able to save a lot of money on loans, insurance, and also on the unknown factors that will occur in the future.
If you are constantly checking your credit report, you can easily identify your credit score and how it will be affected by your financial actions.
Right, now we’re going deep to the heart of the matter, which is how your credit habits really affect that all-important credit score. Buckle up!
You see, the credit bureaus use complex models such as FICO to grade your credit score. These models review your credit report thoroughly and one of the biggest things that they examine is your credit utilization.
Credit utilization is like a report for your behavior towards your credit cards and how you manage them. It is the main aspect of calculating how much of your available credit limit you are actually using.
Here’s the twist: FICO doesn’t deal with the utilization in a monolithic way. They like to portray as the good cop, the bad cop. The good cop checks every single of your credit cards separately. Thus, if you have one card with a low balance and another maxed out, the good cop might go easy with the low one.
But on the contrary, the bad cop appears, who measures your total credit utilization. This is the final addition of all your credit card balances in comparison to your total credit limits across all your cards. Here’s the catch: Even though you have some good habits with individual cards, a bad overall management of a few of them will still bring your score down.
Thus, the two-sided lane of FICO covers both the way of individual card use and the whole credit picture.
And guess what? It’s not just FICO. VantageScore, along with the other big credit scoring system, also puts a lot of emphasis on credit utilization. They might not apply the good cop, bad cop technique, yet they undoubtedly take into account the credit utilization, current balances, and available credit as the main factor in your score.
The bottom line? Your credit score is greatly influenced by the way you handle your credit card balances, which is a big factor in the making of your credit habits. Hence, remember to maintain your balances lower than your limits, and don’t put more on the cards than you can handle. It will make both the good cop and bad cop at FICO happy, and at the same time it will keep your Vantage Score in a good state!
The reason why consistently reaching your credit card’s limit is an issue is because it may lead to a negative impact on your credit score and also restrict your ability to borrow funds in the future.
Imagine it from this perspective. When you borrow money, lenders want to know one thing: are you gonna return the money I lent you? Your credit score is a report card that informs them about the probability of you being a responsible borrower.
Lenders are the ones who are usually the ones to look at this matter, which is the credit card utilization, that means the amount of credit limit that you are using. Here’s the deal: Just like if you are always maxing out your cards, it is a warning signal for credit agencies.
Why? You appear to be in a situation beyond your capacity to handle.
Visualize the scenario where you have $1,000 as your credit limit and you keep on piling up the charges until you reach that limit. To lenders, that might be seen as you are spending more than you can afford to pay back. Not a good look!
Here’s the other thing: High credit card balances are indeed a headache to be managed. The higher the debt you have, the bigger the monthly payments are. If you are facing difficulties in keeping up, you may end up in a situation where you will be further behind and this will eventually affect your credit score even more.
Therefore, the question is what does this all mean?
No, it is not the way to go, as maxing out your cards lowers your credit score and makes the lenders think you are a risky borrower. Such an action can result in the hardship to get approved for loans in the future, and if the approval is given, the interest rate will be high. The fact that a student can’t decide on a career within six months of graduating is certainly not the way to financial success!
The bottom line is: Don’t accumulate too much debt on your credit card. The main thing to remember is to limit your credit usage to less than 30% of your credit limit. This proves to the lenders that you are a responsible and a person who is in control of his/her financial situation. You can go and swipe carefully, my friends!
Take Control: The said Easy Tips to Improve Your Credit Utilization are as follow:
The main question is how to control your credit card usage in order to have a good credit score. Here are some strategies to make that easier:Here are some strategies to make that easier:
Get alerts! Set up the alerts on your credit cards which will provide you a warning when your balance gets close to a turn-off limit you decide. Thus, you will not be confused by the extra charges on your bill.
Spread out your spending. Rather than depending solely on one card, it is more effective to use several cards during a month. Thus, the balances of the individual cards are kept low. However, do not forget that some of the credit scoring machines take into account your total credit card use, so do not be too extravagant!
Time your payments strategically. Learn when your credit card maker sends information to the credit bureaus. The target is to have a low balance by the statement closing date that is the end of your billing cycle. Hence, your credit score will look better and your utilization ratio will be better.
Think about the process of applying for a new credit limit. If your credit limit is small and your balance is huge, you could be falling into the category of high utilization rate. The lesson one reaps is affected by the downplayed limit that you boost. Thus, for example, if your limit is $4,000 and your balance is $2,000 (50% utilization), enhancing your limit to $20,000 will lower your utilization to 10%. Just be mindful that in addition to that you might have to be the one who will be the one to be credited.
Make mid-month payments. Hence, it is a simple method of following your balances. Through the habit of paying your cards twice a month, you can guarantee that they will not go beyond a specific level, say 35% of your limit.
On the bright side, even if your credit utilization is high at the moment, it will not be there forever. Through the lowering of your debts or possibly the raising of your credit card limits, you can boost your score gradually. Try to recall that only responsible credit card habits are essential!
Conclusion:
Folks, we’ve covered a lot today, but let’s remember the key takeaway: credit utilization is a revolutionary factor in your credit score.
Think of it like this: the credit card balances which are lower than the credit limit are the ones that get you a gold star for your credit score. It proves to the lenders that you’re a responsible borrower and that level of responsibility will be rewarded by future benefits such as obtaining a lower interest rate and qualifying for a better loan.
Now, I know what you’re thinking: How can I truly maintain my credit utilization that is not too high or too low? No, I am not going to advise you, I am just going to tell you that I can solve the problem. We had a discussion about the numerous options in this regard, the most important being the setting up of balance alerts, spreading out of your charges, and, most amazing of all, the smart timing of your payments. Recollect, even the slightest modifications can have a huge effect.
Besides, there are few other ways you can use to do it. Think of the idea of applying for a credit limit increase if your situation is suitable for it. When you are applying for more credit, you are temporarily affecting your score. If you are careful, then mid-month payments are a great way to get ahead of the tide.
The good news? The credit utilization may be high now, but it is just a temporary state. The way to start is to follow these tips and to adopt the responsible credit card habits which will help you to increase your credit score gradually with time. Thus, manage your credit utilization, and notice how your financial future will shine!
And that’s the end of my session for today, everyone! Until we meet again, drive safe, and happy swiping – only if it is done responsibly!