What Is Credit Utilization Ratio – How it Affects Credit Scores

Understanding the relationship between credit utilization and your credit score.

There are five major factors that affect your credit score. These are the same factors that a credit scoring model uses in order to calculate the credit score for consumer. A credit score gives different way kitsch to each of these different factors while coming up with the credit rating. These factors are: payment history — repair percent, level of credit utilization — 30%, age of credit — 15%, mix of credit — 10% and credit Inquiries — 10%.

Credit Utilization is the 2nd largest factor to influence credit score

From this information you can see that credit utilization is something that has a large impact on the credit score. But what exactly is credit utilization. The term credit utilization is pretty much self-explanatory. Credit utilization is the ratio between the total credit limit available to you on your credit cards and the part of this credit limit that you actually utilize. For example if your total credit limits is $1000 and you utilize only $200 as a balance on your credit card then your credit utilization is 20%. In order to calculate your credit utilization ratio simply divide your credit card balance by your credit card limit and then multiply by hundred. They had a credit scoring models his credit utilization is, the lower the credit utilization ratio the better your credit score is. This is because using a small part of the total credit limit available to you shows that you are not at a huge risk of defaulting on a large sum of money. People who use a large amount of credit and are always running close to the credit limits are thought to be trying to compensate for their lack of income with the use of credit. Whenever you are close to the credit limit you risk causing the lender more of a loss if you happen to default. A person who utilizes less of this credit available to them is perceived to be more financially secure.

The fico credit scoring model looks at credit utilization in two different ways. First it considers the total amount of credit limit by adding all your credit cards and the credit that you have utilized on all these cards put together. This gives it the overall and total credit utilization. Secondly it also be used each credit card separately. Both the overall credit utilization as well as the credit utilization on each individual credit card is used to calculate your credit score. High credit utilization either in the combined form or individually on any one of the credit card has the potential of lowering your score.

Paying Balance in full May Not Reduce High Credit Utilization

Just because you pay down your balance in full at the end of every month on your credit card is that means that your credit utilization will not be high. You have no accurate way of knowing when your editor reports the credit card to the credit bureau. It may be voting at a time when you are carrying a balance on your credit card is even if you pay down the balance at the end of the month and it down to 0 dollars, the amount reported to the credit bureau may be completely different.

If you areDamage caused to your credit score by high credit utilization is not permanent. You can fix this situation quietly and quickly by bringing down the balances on your credit card. As soon as low balances are reported to the credit bureau you’ll find your credit score recovering once more. It is commonly advised to keep the credit utilization at about 30% of the total credit limits available to you.

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