Your credit utilization is one of the most important driving factors when determining your credit score. Also known as your debt-to-credit ratio, it makes up almost one-third of your total FICO score. The only thing that matters more than how much credit you use is your payment history. It’s important that you learn as much as possible about your credit rating so that you can take the steps you need to keep your scores as high as possible.
What Is Your Revolving Utilization?
Your debt-to-credit or revolving utilization is determined by how much of your available credit you use each month. If you use your available credit each month and then pay off the debt, you should have a fairly decent utilization rate. It’s when you don’t pay off your credit purchases each month that you start to get into trouble. The more debt you carry from month to month, the higher your utilization will be. As long as your rate remains high, your credit score will remain low. Your debt-to-credit rate is based on lines of credit that “revolve” or change from month to month. This would include your credit cards.
What Should Your Debt-to-Credit Utilization Rate Be?
Financial professionals recommend that you keep your utilization rate at 30% or below. The lower your percentage, the higher your credit score will be. One way to keep your revolving utilization rate low is to pay off your purchases each month. Choosing to leave a small balance is fine as long as you don’t let it get above that recommended 30% mark. Keep older accounts open. Even if there is not a balance, the available credit will help maintain a positive debt-to-credit ratio.
Why Is It Important?
Maintaining open lines of credit is essential because it shows you are good at managing your money. When your debt starts to creep up toward that 30% mark, it will begin to bring your credit score down. While that may not be a bad thing at first, if it starts to really dip, you may be perceived as a poor credit risk. This can affect your ability to get an affordable loan. The higher your credit score, the higher your interest rate will be. It may even prohibit you from getting any new line of credit.
What Are the Benefits?
If your revolving utilization rate is kept under 30%, your chance of getting a loan will increase dramatically. You will also be eligible for much lower interest rates as well. This will lower your monthly payments. If you pay more than your monthly payment each month, you will be in even better shape because your debt will be paid off much faster. Understanding how your credit score is figured will give you the incentive to maintain a lower utilization rate. Everything goes hand in hand when dealing with money and how it is used. The harder you work at keeping your revolving utilization rate low, the more opportunities you will have when it comes to obtaining affordable credit for the purchases you want to make.