Your credit score is made up by several different factors.
Your payment history, mix of credit types and even the number of credit inquiries are accounted for in your FICO score.
What some people don’t know is that the amount of available credit you’re using, called your credit utilization ratio, makes up 30% of your overall score.
In this article we’re going to explain what your credit utilization ratio is and what ratio is ideal for the best credit score.
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What Does Credit Utilization Mean?
Credit utilization is the amount of available credit you are using on your credit card accounts.
For example if you have a credit card with a $10,000 credit limit and your balance is $3,000 then your credit utilization ratio is 30%.
The more available credit you are using shows that you not only have debt, but also that you cannot afford to pay off your balances each month and may be struggling financially. FICO considers your credit utilization ratio as a key predictor in how creditworthy a consumer is.
This is why your credit utilization ratio makes up 30% of your overall credit score. Only your payment history has a bigger impact on your score, accounting for 35% of your credit score.
How Your Credit Score is Calculated
Payment History (35%) – Are you paying your bills on time? Your payment history includes late payments and collection accounts. Each time you make a payment on time the ratio of on-time payments increases thus helping your credit score.
Credit Utilization Ratio (30%) – How much available credit are you using? The balances on your credit card accounts compared to the credit limit.
Length of Credit History (15%) – How long have your accounts been open? The average age of the open accounts listed on your credit profile. The longer you have your accounts open, the higher your score will be.
New Credit (10%) – Are you opening new credit or loan accounts? Anytime you open a new credit or loan account you’re adding a new hard inquiry and a new account which will lower your credit score initially.
Mix of Credit Types (10%) – Do you have a good mix of credit types? Having diversity in the types of accounts you have will help your overall credit rating. If you have credit cards, auto loans, mortgage loans, etc. this will help your score more than if you just have credit cards.
What is the Best Credit Utilization Ratio to Maintain?
The lower your credit utilization ratio the higher your score will be. 30% is a common target utilization ratio recommended online, however maintaining a utilization ratio below 15% will help increase your credit score even more.
Having a low credit utilization ratio is especially important if you are planning on making a large purchase in the near future, such as a mortgage. Because your credit rating is directly tied to the interest rate you will receive on a loan you’ll want your score to be as high as it can be when applying for a loan.
How to Lower Your Credit Utilization Ratio
The obvious way to lower your utilization ratio is by paying down the balances on your credit cards. But there are a couple tricks you can do that will help you lower your credit utilization ratio even faster.
Increase Your Credit Limit
When your credit limit is increased your utilization ratio will automatically improve. You can call your credit card issuer and request a credit limit increase, it’s that simple.
Lower Your Interest Rate
By reducing the interest rate on your credit cards you will be able to pay down your card balances even faster. You can contact your card issuer to see if they can reduce your interest rate. They want to keep you as a customer so if you have a good track record with them they may be willing to help.
Credit Utilization FAQ
How does your credit utilization ratio affect your credit score?
Your credit utilization ratio accounts for 30% of your overall FICO score. Only your payment history (35%) has a greater impact on your credit score.
Should I keep my credit utilization ratio at 30%?
I would say that 30% is still too high, the lower the better. I recommend that consumers maintain a credit utilization ratio of 15% or lower.
What are some ways I can maintain a low credit utilization ratio?
Paying the balance off in full each month is the best way to maintain a low credit utilization ratio. It’s also good to use your debit card more often rather than racking up charges on your credit card, even if you plan on paying it off in full at the end of the month.
This is especially true if you plan on making a big purchase soon such as an auto or home loan.
Creditors report to the credit bureaus at different times and you don’t know when that is. So maintaining a low balance on your cards is very important to ensure a low reported balance to the credit bureaus.