Credit utilization is an important factor that affects your credit score. In fact, it accounts for about 30% of your FICO score. Credit utilization refers to the amount of credit you use compared to your total credit limit. For example, if you have a credit card with a limit of $5,000 and you have a balance of $1,000, your credit utilization rate is 20%.
Why Does Credit Utilization Matter?
Lenders and creditors use credit utilization as an indicator of your creditworthiness. They want to see that you can manage credit responsibly and that you’re not maxing out your credit cards or other credit accounts. A high credit utilization rate can signal that you may be a risky borrower, which could make it harder to get approved for credit in the future.
What is a Good Credit Utilization Rate?
Generally, it’s recommended that you keep your credit utilization rate below 30%. However, the lower the better. For example, if you have a credit limit of $10,000, you should aim to keep your balance below $3,000. This shows lenders that you’re responsible with credit and can manage your finances well.
How to Improve Your Credit Utilization
If you have a high credit utilization rate, there are a few things you can do to improve it:
In conclusion, credit utilization is an important factor that affects your credit score. Keeping your credit utilization rate low is a key part of maintaining a healthy credit score. By following the tips above, you can improve your credit utilization rate and improve your creditworthiness over time.