Credit Utilization: How This Affects Your Credit Score

What is a credit score and how is it determined?

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When you become an adult and start spending and saving your money, you will most likely move into the world of credit. Credit can be used to provide a loan for a purchase such as a house or car, but it might also apply to credit cards. Your credit score is made up of the history of your use of the credit that you have available to your and how well you do with making payments that are due. Various credit companies have their own version of your credit score and that score can vary greatly because of how that score is determined. It is important to know about the various scores that you have and how you can improve those scores going forward. By doing this, you will improve your ability to receive credit when you need it and that can be important if you are looking to make a major purchase in your immediate future.


What is credit utilization?

No matter who you are, you have a certain amount of credit available to you. This will include the limits you have on your credit cards as well as any loans that you might have. When you add all of these limits together, you will find the total amount of credit that you can draw from. Next you will want to look to see how much of that available credit you have used so far. Now divide the amount you have used by the amount you have available and multiply by one hundred to give you your credit utilization. This is the amount of credit that you have used of the total amount of credit that you have available. The lower this number is, the better your credit score will be. However, if you aren’t using any of your credit, this can turn against your score a bit, so you should at least be using your credit a little bit to keep the system from penalizing you. (Note: You will also find that if you are not using credit, then your credit score will be low because you have no credit history, but that is a topic for another time.) If you can keep your credit utilization below thirty percent, you will find that your credit score will be doing very well.

How can I lower my credit score?

While credit utilization is one of the major parts of computing your credit score, you will also want to be aware of several other items that can have a negative impact on your score. Let’s look at a few of them.


Late payments will hurt your credit.

Your credit score is an indicator of just how reliable you are as a credit user. If you have late payments, you will find that having a bad impact on your credit score. Your best bet is to sign up for automatic payments so that you can be certain that your payment arrives on time. Just make sure that you are invested in making sure that the funds are in your account so that the payment will not be returned since that will not help your credit either.


Keep your cards active even if you aren’t using them.

Let’s say that you have three credit cards, but you only regularly use two of them. It may seem to make sense to cancel the other card, but do not be too quick to make that call. Remember that credit utilization is determined based on your total credit score. With this in mind, if your third card has a high credit limit, you may find that when you cancel it, you may find that you have gone from a credit utilization of less than thirty percent to a number that will have bad results on your credit score. You can cancel an unused card as long as you are making sure that you are aware of how it will impact your credit score.

Errors on your report

Anyone can make a mistake and that even includes the people that work at any of the credit scoring companies. That is why you want to make sure to check your score and report on a regular basis. You may not find a large problem, but there are stories of people that have found activities from people with the same name, but are a different person. This will also allow you to avoid any fraud on your account as well. Be on the watch for someone using your identity and credit without your permission.

Other items to look out for with your credit

When you are using your credit, you want to make sure that you are using it in a way that shows that you are responsible with your usage. First, avoid going over your balance. If you are close to you limit, keep a close eye on how much you are spending on that card. If you aren’t aware of this, you may find yourself going over your limit and this will be a problem for your credit score. Your terms and conditions on your card can change at any time, so you want to keep track of your interest rates so that you know what you will be paying.

Keep better track of your credit.

When you are working with improving your credit score, you want to know about your credit utilization so that you will be able to keep yourself from using too much of your available credit since this will have a negative impact on your credit score. Don’t worry if you have a bad score right now. You can still improve it by making the best possible choices with your credit usage and being aware of how you are using it. Keep looking at your credit reports so that you can watch out for errors that will harm your scores. Making the most of your credit is the best way to care for yourself.

Credit Utilization

A credit utilization ratio is a calculation of how much debt you have versus your credit limit. 

The credit utilization ratio is calculated by looking at your credit limits and determining how much of the limit you have used. If you have $500 on a credit card and you used $400, then your usage of the card is high. This negatively impacts your credit score because of the high amount of debt. If you have three credit cards, and the other two are below the 50% usage mark, it looks more favorable, than if you have all three cards maxed out.

In the first decade of the millennium, it was highly publicized by bankruptcy experts and financial gurus like Stephen Snyder, The Motley Fool writers, and others that you need to have your debt below 30% of your credit limit. In other words all revolving credit accounts should be at 29% maximum of the credit limit in order to increase your credit score.

In this strategy, it is about the amount you owe versus the payment history. Yes, payment history matters, but the idea behind this strategy is to focus on the amount debt owed, while maintaining correct monthly payments.

How it Works

  • Maintain a balance that is at least 71% below your credit limit.
  • Record how much you are charging to each revolving credit account.
  • Have balance alerts set up.
  • Obtain a credit limit increase.
  • Determine when our creditor reports to the bureaus.
  • Pay mid-cycle to your card to show an extra payment for the 30-day cycle.

The quicker you can pay down debts the better for this strategy to work on your credit score.


  • The amount of credit you have and the amount you utilize can determine your credit score.
  • If you use more of your credit, meaning your are above the 30% mark, your credit score will decrease.
  • A lower credit utilization ensures your credit score will increase or at least stay the same.
  • By using this strategy, you know when to make payments to reflect well on your credit report.
  • You are also lowering your credit utilization ratio with additional payments.

Yes, the consistent and increased payments help in this strategy, but remember the focus is to get your revolving debts below the 30% mark to help increase your scores.

Steven Millstein

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