Your credit utilization ratio is the amount of revolving credit you are using now divided by your total amount of revolving credit. Sometimes, people refer to this as a credit utilization ratio. Generally, this ratio is expressed as a percentage.
Let’s say you have two credit cards with $10,000 available in total. If you have a $5,000 balance on one, then you have a credit utilization rate of 50%.
When calculating your credit score, credit scoring companies will use your credit utilization rate. This number often makes up next to 30% of a credit score, making it one of the most important numbers to look out for.
It is important to keep a low credit utilization rate, as it shows lenders that you don’t need to use all of your available credit. High credit utilization rates show lenders that you might be overspending, which can lower your credit score.
Understanding Revolving Credit
Revolving credit is the only type of credit that goes into a credit utilization ratio. Lines of credit and credit cards are types of revolving credit. Mortgages, auto loans, or installment loans, are not part of this ratio.
They call it “revolving credit” because the amount of credit you carry changes and carries over from month to month. There is no end date that is pre-determined. You borrow against your credit limit every month. Each time you borrow, you reduce the amount of credit that is available to you.
The important thing is that you don’t reach your credit limit and continue making on-time payments to make sure that your account stays in good standing. You also need to keep in mind that you’ll pay interest on this credit every month as well. To keep your credit utilization rate low and your interest from accruing, it is important t
o pay off your balance every month in full.
How Does Closing a Credit Card Impact Your Credit Utilization Rate?
Similar to the way that applying for a new credit card can have a negative impact in the short term, closing a credit account can also have a negative impact. Whenever you close your credit account, you reduce your limit overall. Closing a credit account won’t do anything if you don’t owe anything on your credit cards as it is, as your credit utilization rate is already 0.
Connecting My Credit Utilization Rate and My Credit Score
There are many factors that can impact your credit score and your credit utilization rate is just one of them. Keeping it low, however, can have a significant impact and help you maintain a higher score. Of course, increasing your credit score can come from many different actions.
If you’re looking to increase your credit score, get in touch with us here at Personal Tradelines to see what we can do. We’ve helped introduce thousands of customers to the beauty of tradelines, securing positive financial futures. We look forward to hearing from you.