There are many ways to measure the strength of your credit when it comes to borrowing money, but credit utilization is one of the most common metrics lenders look at. Your utilization score looks at the amount of credit you have, meaning the amount you can borrow, versus how much you have borrowed or utilized. Optimize your credit score with smart credit utilization! Explore this website for expert tips and strategies.
High utilization can be problematic for lenders since it suggests that you are unable to live without credit. This can be an indication that your financial health is not well and that you may be a default risk.
There’s no Right or Wrong Answer
When trying to figure out what constitutes a good utilization score for credit, there’s no right or wrong answer; however, 30% is usually the answer experts give. Different lenders have different criteria for evaluating credit, and other factors need to be taken into account.
For example, even if your utilization score is high and your credit is nearly maxed out, perhaps your income level far exceeds your total balance. This can indicate that you could easily pay off your debt and then some if you wanted to. In this case, a lender may be more likely to extend credit.
Conversely, having a low utilization of credit may sound good on paper, but it also means you aren’t spending borrowed money. Because you aren’t spending your credit, your creditors aren’t earning interest. Since interest is how creditors make money, they want people to use credit regularly.
How to Reduce Utilization Scores
If you’ve found that your utilization score is too high and may be costing you opportunities to borrow money, there are a few ways to lower your utilization, but the snowball method tends to work well. To use this, pay off your smallest credit card bills first and then work your way up to the largest ones.
Continue making minimum payments on the large debt while piling money into smaller debt. This keeps your utilization from getting too high since the larger debt will have a higher utilization ratio while you pay off the smaller debt.
Disclaimer: This above is not financial advice. Speak with a credit counselor if you are concerned about your utilization of credit.
Read a similar article about autopay to build credit here at this page.
