Credit utilization is an important part of the credit score maintenance cycle. You want to make sure that you’re not shooting too high and using too much credit.
What is credit utilization?
Credit utilization is a simple ration that captures how much credit you’re using. E.g. if your limit on a single card is $5000, and you’re using $4500 of that your credit utilization is 90%.
This is bad news.
Your credit utilization should be around 30% if you want to maintain a good score.
You don’t want to borrow money, simply because it’s available. It’s important to be frugal in your investments and only take credit when necessary. You shouldn’t overspend and consume too much debt in one go.
Why does credit utilization matter?
A high credit utilization score tells the lenders that you’re burning too much cash on a single loan. Even though it within your rights to accrue that debt, you want to be under the limit at all times.
This is because if you’re late on your payments or have a missed payment in one month, your collective impact on your score will be incremental.
Credit utilization is usually calculated on your outstanding balances, so you should avoid going over 30%. Don’t reach your max limit as a general rule. There are however steps that you can take to ensure that you don’t go over your credit utilization limit.
Raising your credit limit
If you’re spending through about $3000 a month on your payments, and your credit limit is set at $5000, then you may be utilizing too much of it. You can request the financial institution involved to boost your credit limit to $10,000.
This may involve a hard inquiry which may reduce your score a little bit. But in the long-term, your credit score will increase as you’re not utilizing your complete line of credit.
The timing of credit bureau reporting
In general, most credit card companies report your balances and payments every month. If you can find out the exact date when they report it, you can pay off your balances on time. This will make the credit bureau think that you always have a positive balance.
Therefore, you should try to pay off as much as possible early on. This will also help establish a higher credit score after you’ve paid off your balance.
Setup alerts and pay mid-cycle
The best way to ensure that you’re not taking too much credit is to set up alerts from your lenders. Most automated systems can send you a text or email if you’re going above a certain limit. You can keep a track of your limits and ensure you’re not taking on too much credit.
You can pay off your monthly payments in the middle of the cycle. This is so that when your balance is reported each month, you can appear to be balance positive. This will help you establish a great credit score over time.