What Is Credit Card Utilization And Why You Should Care
Has your credit score been going down recently? Are you having trouble managing your line of credit responsibly? One of the main factors that influence your credit score is your credit card utilization. If your utilization ratio is poor and you’re using too much credit line you may notice your credit score decreasing. Below we’ll discuss what is credit card utilization and why it is the key to improving your credit score.
The Effects of Credit Card Utilization
If your trying to understand what is credit card utilization and how it impacts your credit score, realize this one thing. Credit companies take your credit utilization into account when determining your score. Your score influenced by several different factors, predicts a credit utilization weighting of 30%. This percentage makes your card utilization more important when determining your score than any other factor, except for credit history.
Although there are no hard and fast rules, in general, it is better to have a utilization of 30% on your accounts.
It is very easy to calculate your utilization ratio. If your credit limit is $6,000 and your balance is $3,000 the resulting credit utilization ratio will look like this: 6,000 / 3,000 = 0.5 = 50%. This means that you have a utilization percentage of 50%, which is a bit higher than the ideal amount.
So why is it important that you don’t let your credit card utilization get so high?
1. Demonstrates a Lack of Self-Discipline
Taking your psychology into account, creditors predict that you may be more likely to be bad at managing your money. In fact, you have a greater risk of going bankrupt if your utilization is high. It is very easy to get credit in America. Therefore, it’s easy to overuse credit cards and to take on too much debt.
People who are great at managing their money, usually will show a lot more constraint with their credit card usage. Credit card users who keep their utilization under 30% should be more reliable. And as a result more likely to continue making payments on time for years to come.
Credit bureaus don’t collect income data. However, it is assumed that most credit card limits are a bit more than the income you declared when applying for a card.
If you have large amounts on your card, and it appears to be more than your monthly income, then this means you are more or less in debt to the credit card companies. This is not good.
While your debt-to-income ration doesn’t directly affect your score, it can be a factor in determining your reliability.
Your DTI ratio sums all your monthly debts and obligations such as monthly credit card payments and loan payments. This may also include other payments such as alimony. Afterwards, divide the sum by your monthly income, before taxes
3. Living Off Of Credit
When you are using your credit card too often it may appear that you are living off of credit, rather than a reliable income. This is a clear red flag that makes you seem unreliable.
If you are living paycheck to paycheck or relying on credit cards for monthly expenses you won’t be seen as a trustworthy borrower. You may be seen as a potential risk for your credit card company.
Credit isn’t really intended to be used for monthly expenses or as a replacement for your monthly income. When you seem to be using it for your everyday living expenses and aren’t paying it all back each month, this is a signal that you may not be capable of paying back the debt in the future.
If you have a credit card one of the best things you can do is learn what is credit card utilization then work to lower your utilization ratio.
Remember that, at least as a general rule, you should keep your ratio below 30% utilization at all times. By managing your card wisely, and keeping your utilization low, you may find that your credit score starts to rise once again.
Looking for guidance on your personal finance needs? Have questions? Contact us today to learn more about what Credit Squared can do for you.
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