When it comes to building credit, one of the most important things to keep track of is your credit utilization. Credit utilization is a measure of how much of your available credit you’re using, and it plays a major role in determining your credit score. Knowing how to calculate credit utilization is key to understanding how to build a strong credit history. In this blog post, we’ll explain how to calculate credit utilization and how it can help you build credit.
What is credit utilization?
Credit utilization is a key factor that contributes to your overall credit score and is used by lenders to assess your creditworthiness. It measures the amount of available credit you are using compared to your total credit limit. The higher your credit utilization, the less desirable it is to lenders when building credit. Credit utilization is calculated by dividing the total amount of credit you have used by the total amount of available credit. For example, if you have a $1,000 credit card with a limit of $2,000, your credit utilization rate would be 50% ($1,000/$2,000). Generally speaking, a lower credit utilization rate is better as it indicates to lenders that you are a responsible borrower.
How to calculate credit utilization
The formula for calculating your credit utilization rate is simple. All you need to do is divide your total current outstanding balances by your total credit limits. The result will be a percentage that represents your credit utilization rate.
For example, let’s say you have two credit cards: one with a $2,000 limit and one with a $3,000 limit. You currently have a balance of $1,500 on the first card and $1,000 on the second card. Your total current outstanding balances are $2,500. Your total credit limit is $5,000. So, when you divide the current outstanding balances ($2,500) by the total credit limit ($5,000), you get a credit utilization rate of 50%.
It’s important to remember that when it comes to credit utilization,
Different card issuers and credit bureaus may use different calculation methods. If you have more than one card, make sure you understand how each issuer calculates your credit utilization.
Your credit utilization ratio is an important factor when it comes to your credit score. Generally, lenders prefer to see a low credit utilization ratio (typically 30% or less) because it shows that you’re responsibly managing your credit accounts.
What is a good credit utilization ratio?
Your credit utilization ratio is an important factor when it comes to building and maintaining good credit. The general rule of thumb is to keep your credit utilization ratio below 30%. This means that you should try to keep the amount of debt you have relative to your total available credit at or below 30%. In other words, you should never have more than 30% of your total credit limit in use at any given time.
For example, if you have a total available credit limit of $10,000,
Your goal would be to keep your balance under $3,000. This means that you should try to pay off as much of your balance as possible each month and only spend what you can afford to pay off in full.
Having a low credit utilization ratio will help you build and maintain a good credit score, as it shows lenders that you are managing your finances responsibly. Paying off as much of your balance as possible each month will also help reduce the amount of interest you are paying over time, which can save you money in the long run.
Make all payments on time
When it comes to improving your credit score, making all payments on time is perhaps the most important step. Payment history accounts for 35% of your credit score, and making timely payments is key to maintaining a good credit score.
If you’re having trouble making payments on time, contact your lenders as soon as possible. They may be able to work out a payment plan with you or provide other assistance. You should also try to set up automatic payments from your bank account so you don’t miss any due dates.
You should also make sure that you check
Your credit report for errors or inconsistencies that might affect your payment history. If you find any errors, dispute them with the credit bureau immediately. This can help ensure that your credit score isn’t lowered unnecessarily.
Making all payments on time is essential for building a good credit score and financial health in general. Being late or missing payments can have a negative impact on your credit score and make it more difficult to borrow money in the future. So, it’s important to make all payments on time to maintain a good credit score.
Keep balances low on credit cards and other ‘revolving credit’
When it comes to credit scores, your credit utilization ratio (the amount of debt you have compared to your total available credit) is a key factor. Aim to keep your utilization ratio below 30%, and preferably as low as possible. Paying off credit card balances each month is an excellent way to maintain a healthy credit score. Also, be aware of revolving credit accounts like lines of credit or loans. It’s important to stay on top of these debts, paying them off as soon as possible. Having too much debt can hurt your credit score, even if you make all of your payments on time. To improve your credit score, focus on keeping your balances low and manageable.
Apply for and open new credit accounts only as needed
Applying for and opening new credit accounts should only be done when absolutely necessary. Having multiple lines of credit can help you build your credit score if managed correctly, but too many inquiries or accounts may negatively affect it. When applying for a new credit account, make sure you understand the terms and conditions, fees and interest rates.
You should also consider the type of account you are applying for and make sure it is suited to your needs and that you are capable of repaying the debt within a reasonable amount of time. If you are unsure about any aspect of the credit card or loan you are applying for, seek advice from an independent financial advisor before submitting the application.
Finally, once your new account is opened,
It’s important to manage it responsibly. Make timely payments and keep your balance low to maintain a healthy credit score. Doing so will ensure that you benefit from having access to additional credit without damaging your score.