Will Lowering My Credit Utilization Raise My Score?
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Your credit score is one of the most impactful parts of your finances. Having a good score means that you can get access to nearly anything that you’d like and at the best rates that the industry has to offer. If you have bad credit, let us help. We specialize in credit repair services and can get you back on track.
Having a bad credit score can play havoc on your life. If you need to buy a car, buy a home, get credit cards, rent an apartment, or about a thousand other things, it can be very difficult to do with bad credit.
Even if you do qualify for these things, they will no doubt come with the highest rates that there are. This means more money spent over the life of your loan and more money that could have been better spent elsewhere.
So, it is important to manage your credit and know not only how it impacts your life, but how the decisions you make impact your score. The first thing that you need to know about is your credit utilization.
What Is Credit Utilization?
Before we can understand the impact of specific areas of your credit, we need to focus on what some of those things are. Your credit utilization is one of those things.
In short, your credit utilization is a ratio of whatever outstanding balances you have on your credit cards to the total limits that those cards have. This is to measure the total amount of your available credit that you have in use.
If you have a total credit limit of $3,000, for example, and an outstanding balance of $1,000, then your total credit utilization is 30%. You can also calculate your total credit utilization by dividing your credit card balance by your total credit limit and then multiplying that by 100.
Why Is Credit Utilization Important?
Credit utilization is one of the major factors for most credit reporting agencies. FICO, for example, weighs credit utilization at around 30% of your overall credit score. So, staying at a proper level is important.
Also, according to FICO, a proper credit utilization will be at 30% or less. This might seem arbitrary, but there is a reason for this. This is a judgment of the overall amount of credit that you are currently using.
A higher utilization shows that there is a greater dependence on credit. This is a dangerous path as an over dependence on credit can lead to increased debt, missed payments, and serious repayment issues.
By having a lower credit utilization, it shows lenders that you manage your credit lines responsibly. Even if they are used, they aren’t leaned upon heavily. It shows that you don’t necessarily need that credit to survive your day-to-day life.
Keep in mind that even if you have made a major change to your credit limits – either paying down balances or paying them off entirely – credit scores are calculated based on the most recent information that gets posted to your credit reports.
This means that information is not updated in real time, it is updated based on your billing cycles. So, if you have paid off a major portion of your credit card debt, don’t be alarmed if it doesn’t reflect on your credit score immediately.
Why Is Using Credit Card Capacity a Bad Idea?
Though we touched on this a little earlier, it is important to make it known why spending to your credit limits is a bad idea. Always remember this: Your credit score gives lenders a better idea of how likely you are to pay back the money that you borrow.
There are, of course, certain factors that will make borrowers more likely to fall behind on payments or to default on their credit obligations. Having a high credit card and loan balance is one of those factors.
When you have higher balances, they are more difficult to afford. Moreover, they could indicate that you have overextended yourself on your finances. Again, it can show that you are more dependent on credit than is healthy.
These factors, like your credit utilization, can lower your credit score and give lenders the idea that you are an increased risk to either fall behind when making payments, or be unable to do so entirely.
Thankfully, there are a few ways to make your credit utilization look a lot better and to bring it down to a manageable level.
How to Keep Your Credit Utilization Under Control
There are a few obvious statements to be made about your credit spending limit. The first is this: Don’t spend to your limit. If you can manage it, don’t use your credit cards unless it is absolutely necessary.
That sounds easier than it can be at times and there are people in a situation where that is already too late. Still, there are methods that you can implement to keep your credit utilization percentage in check so that your score can benefit from it.
One of the easiest things that you can do is to set up alerts for your credit cards. Even better, you can set balance alerts. This will let you know if you have exceeded a designated balance so that you can set those aside and stop spending on those cards.
In addition to monitoring your balances, you can also try spreading out your charges. If you have multiple cards, you can keep your utilization down on those cards. But keep one thing in mind: Some credit models will look at your total credit usage, not just card by card. If this is the case, spreading out your spending may not do the trick. Be aware of that.
Believe it or not, timing your payments can also be beneficial. Try to find out when your card issuer tends to report information to all of the credit bureaus. With this information, you can specify the date where you pay your bills.
If you have a higher balance when your issuer tends to send out your account information to each of the bureaus, your utilization will be too high. Paying it before they report can bring your total credit utilization down and reflect better on your credit score.
Believe it or not, you can also ask your credit card company for an increase in limit. Granted, you can’t just arbitrarily ask for an increase when you feel like it, but there are instances where asking for an increase is normal.
Perhaps you have had a change in income and are now making substantially more than you previously did. Call your issuer and ask for an increase in your credit limit. This will have a two-fold impact.
The first is that it will bring down your total utilization by giving you more credit. That change can result in a potentially sizable deduction in your overall credit utilization and help to bring your credit score up.
The second is that you now have much more credit available. This can come in handy when you have a major emergency such as a car breaking down. Keep in mind, though, that you could be dinged for asking for additional credit. This is because hard inquiries can be needed, and those hard inquiries can damage your credit.
On the other hand, if you have made a couple of late payments or now make less than you did previously, your card issuer could potentially lower your credit limit. Know your circumstances before asking for an increase because it can backfire.
Lastly, you can try to pay more than your minimum balance. It should go without saying that keeping a low balance and low utilization is the best way to create a low-maintenance, optimal utilization.
The good thing about credit utilization is that you can lower it in a relatively short time period. When you do manage to lower your balances (or increase your limits), your credit utilization will come down and, by proxy, your score will go up.
Another Thing About Credit Utilization
As mentioned previously, FICO states that you should have a 30% credit utilization or less. This can lead to the misconception that hitting 31% immediately drops your score off a cliff. This is not the case.
FICO in particular uses a sliding scale for their credit utilization scoring system. There is no hard-and-fast rule where being even a point over that designated limit makes your credit score that much worse.
It’s important to understand that credit scoring uses strict mathematical calculations. These are based on data that reflects experiences of many and is designed to predict risk. This means that there are not numbers (like the 30%) that are easily or universally applied.
The scoring here would then apply points for each percentage point. So, in theory, the lower your percentage rate, the more points you would get on your credit utilization. The more utilization that you have, the lesser points.
So, no, having a 31% credit utilization will not completely tank your score. But just keep in mind that the more you use, the lower your score will be.
Other Factors in Credit Score
Your credit utilization is not the only factor in determining your credit score. While it does have a sizable impact in your overall score, there are other factors that you can work on to improve your overall score.
Aside from credit utilization, your payment history is one of the largest factors when it comes to your credit score. This is the clearest indication as to how you pay your bills. If you have late payments (or completely missed ones), then it can have a major impact on your overall score.
FICO puts 35% of your overall credit into your payment history. It is the single most important factor that there is in credit scoring. One missed payment can have a negative impact on your score, so try to never miss a payment.
There are things that you can do to never miss a payment. The easiest is to set up autopay. This way, your bill is automatically deducted from your bank account each month. No forgetting about the payment date or forgetting to pay a bill.
The next is to be aware of your payment dates. Know when your credit payments are due each month and create alerts or write them down on a calendar. Just make sure that you know when they are due so that you don’t forget to make a payment.
Even if you have missed a few payments, it isn’t too late to turn things around. A couple of on-time payments can begin to set a positive payment trend and that can reflect positively in the eyes of your creditors.
The length of your credit history is important too; around 15% of your overall FICO credit score. To determine your credit age, it takes your oldest credit account, your newest credit account, and averages the age of all of your accounts.
Having all new credit accounts is not good for your score, though it isn’t totally bad, either. Generally speaking, that is treated as “new” or no credit. Essentially, you don’t have a history worth noting.
The longer that you have a credit account, the better. When your credit history is longer, your credit scores tend to be much higher. So even if you have little to no balances on your cards, do not close out those accounts because your credit history length is important.
Your mix of credit is important, too. Your credit mix accounts will encompass 10% of your total FICO score. People with the very best credit scores have a wide range of credit accounts. This can include credit cards, a car loan, mortgage, student loan, or some other form of credit product.
Scoring models can vary and consider different types of accounts. But this is important because it gives an indication as to how well you manage your various forms of credit. It isn’t necessarily that you have a lot of accounts, it is that they are all in good standing and that you are on-time with your payments.
Lastly is whether you have any new credit lines open as well as the total number of hard inquiries that lenders have made on you. This is the last 10% of your FICO score.
A hard inquiry generally happens when you apply for a credit card or some other type of loan. This is the lender making an inquiry into your credit history to determine your risk factor and overall level of trustworthiness when paying back that loan.
Keep this in mind so that you don’t have too many new credit lines open at once. This is obviously something that is less in control if you have no credit history, but it can be managed later on.
The goal is to only have one new line of credit open at a time. Space them out if at all possible so that you don’t have too many open lines of credit that have just been opened. It can be damaging to your credit in the short-term, though it will be remedied eventually.
Be Diligent with Your Score
The goal, no matter what aspect of your credit score, is to be diligent and to make payments on time. If you can manage to pay your bills on time, you will likely have a pretty good overall credit score.
Keeping your overall credit usage down, keeping your credit lines open for longer, and abstaining from opening new lines of credit often can help to keep your score in great condition.
The good thing is that even if there are negative marks against your credit report, they can be remedied and often in short order. It is important to keep an eye on your scores so that you know what it is and what needs work.
For your credit utilization, don’t fret if it is a little on the high side. You can pay that down in short order and it will reflect on the next cycle of your credit report. The lower that your utilization is, the higher your credit score will be.
It can be all too easy to let your utilization become on the high side, but it isn’t the end of the world. Assess your credit and know where the issues are. Even if you can’t make a change in the short-term, you can know what needs to change so that you make those changes when it is optimal.
Your credit score plays a major role in your life. It has an impact on all areas from getting a home to even being able to rent a vehicle. Don’t let a negative credit report become a hindrance on your ability to live life and get the things that you need.
Work on bringing down your credit utilization so that you can improve your overall credit score. You will be thankful that you made the appropriate changes and turned your credit around for the better.
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