Credit Utilization Rate
By
Graham Billings on July 22, 2010
There are several ways to improve your credit score, but perhaps none are as easy as improving your credit utilization rate. Credit utilization rate is defined as the ratio of total credit card debts divided by the limit on your credit card. For example, it is suggested that you never have a credit utilization rate over 35%, which would equate to $350 of debt for every $1000 on your credit limit.
Credit utilization rate is a surprisingly
important aspect of your credit score. There are several reasons why this is the case. To a credit card company, a
high credit utilization rate means that either the person is spending a lot of money, very close to their limit, or that they have a low limit. Both of these are bad things to a credit card company – if you are spending money close to your limit, it means that you may be a risk to exceed your limit. Similarly, if you have a low limit, it says to a credit card company that you may be untrustworthy with a large limit. Both of these inferences lead to a lower credit score.
As a result, one of the best ways to improve your credit score is to keep a watchful eye on your credit utilization rate. It is important that your rate is above zero – companies are afraid of people who do not use their credit cards at all, because it looks like they are not credit worthy – but it is equally important that it is in a manageable range somewhere between 10% and 30%. This way, you can show that you know how to manage your money and credit. Often, credit problems lead to more credit problems when companies see you as a risk, but similarly, benefits can lead to more benefits. If companies see that you can
manage your credit utilization ratio, they will see you are safe, and they will be more likely to give you more credit in the future.