Credit Utilization Affects Your Score

Credit utilization reflects how much of your available credit is being used at a given time.  Lower credit utilization indicates that a borrower is not heavily relying on their credit and that they are using their credit responsibly.

Is calculated by dividing your total credit card balances by your total limits.  The higher the percentage, the higher the risk which adversely affects the credit score according to most of the companies.  It is recommended that your credit utilization be under 30% to positively impact your credit score.

If the available limit on a credit card is $12,000 and their normal monthly balance is around $3,000, they have a credit utilization of 25%.  If for whatever reason, the borrower's available limit was reduced to $6,000, and their long history of having a monthly balance of $3,000, the ratio, then, increases to 50% which will likely lower their credit score.

For borrowers who use more than 30% of their available credit and regularly pay off the bill each month, they should consider making payments toward the balance more frequently, like every two weeks.  This keeps the balance lower, and, in many cases, the card issuer will only report the credit activity once a month to the credit bureau, usually on the monthly closing date of the account.

Another option may be to use multiple cards, if they are available, for the purchases during the month.  Based on the limits of each card, this could result in lower utilization on a single card.

You could also ask for your available credit to be increased.  Assuming you have a good history of paying on time, this may be an easy fix.  Before doing this, ask if it could negatively impact your credit score because it will be reported as a hard inquiry on your credit.

If you are trying to improve your score to qualify for a mortgage, consult with a trusted mortgage professional who can advise you specifically for your situation.  If you would like a recommendation, please contact mekim@novakadvantage.com.