When you got your first credit card, well-meaning family members probably warned you to keep your credit utilization below 30%. You might have even been advised to use 10% as your threshold. This might not make sense when you clearly have access to all the money on your card. What’s the point of a $10,000 card if you can only spend $1,000 to 3,000? This is a valid question, so let’s take a look at how credit usage affects your credit score.
What Is Credit Utilization?
Your credit utilization refers to the percentage of your credit that you use. When determining your credit score, scoring models consider the overall credit utilization and the credit utilization for specific credit cards.
In other words, scoring models might note that your overall credit usage is 10% but you have one card that has a 50% utilization rate. Note that two changeable factors affect your credit utilization rate: the limit on your credit card accounts and your total accessible credit.
How Does Credit Utilization Affect Your Score?
Experian explains that credit utilization can affect up to 30% of your overall score. This makes it one of the most important credit score factors to consider when building your credit score. So, is it really important to keep your credit utilization at 30% or less? According to Experian: yes, it is. The lower your revolving credit utilization, the more favorably credit scoring models and lenders judge your money management skills.
To test this theory, one staff writer paid off all her credit cards, which were previously around 10% utilization. She then kept a utilization rate of 0% to 2%. Within a few months, her credit score climbed by about 50 points. She then brought one credit card up to 50% utilization while keeping the others low or at 0%. She watched her score plummet by around 30 points. When she brought a second card to 40%, her score plummeted by another 20 points or so.
Note that several factors affect your overall score. Consequently, other factors in your credit history will determine how increasing credit utilization might affect your credit score.
What Are Some Good Credit Card Utilization Tips?
Besides keeping your credit utilization as low as possible, there are other things you can do to improve your credit card management skills. Note that some of these will depend on the cards you have available to you.
Pay Off Monthly
Get into the habit of paying your cards off every month. This is a great way to keep your credit utilization low and ensure your credit usage never gets out of hand. If you struggle with monthly lumpsum payments, break them up to match your paycheck.
You need multiple cards for this one. Spread your expenses out across all cards. This increases the likelihood of ensuring none of your cards go over the 10% to 30% threshold you set for yourself.
Look for Zero APR
When applying for cards, if you qualify, consider looking for credit cards that have zero-APR promotions. Store cards often have this, such as the Google Store Card and the Amazon Prime Credit Card. If you need to carry a balance, these are best.
When spreading your expenses out evenly, it’s a good idea to plan expenses according to rewards. Some rewards include cashback that you can put toward your current bill or future expenses. Others might include travel miles, phone insurance or travel insurance.
How Can You Improve Credit Utilization?
The most obvious way to improve credit utilization is to use your card sparingly and pay it off. What if this option isn’t available to you?
Pay Down Balances
If your credit score is your priority, when paying down cards, pay off the ones with the highest balances first to reduce utilization. This is the opposite of the popular snowball method.
Open More Cards
The more cards you have own, the higher your available credit tends to be. However, new credit cards also mean new inquiries which can cause temporary dips in your credit score.
Ask for Increases
If you can’t risk a potential inquiry right now, ask for credit limit increases on the cards you use most often. Sometimes, you can do this from your banking app or the website.
If your banks don’t grant you increases or these are not enough, ask a loved one for a favor. Being added to their well-maintained credit card account could do wonders for your score.
Get a Tradeline
If your loved ones are also focusing on building their credit scores, adding you might not be possible. You can achieve the same effect by purchasing tradelines.
How Can Coast Tradelines Help?
We help people just like you build their credit histories. In fact, the lower your credit score, the more you stand to benefit from tradelines. While tradelines are not immediate credit boosters, they are an excellent addition to your credit-building plan. Complete our assessment to get started.