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What is Credit Utilization?
by
JG Wentworth
•
January 15, 2025
•
5 min
When it comes to managing your finances, few metrics are as crucial as your credit score. Credit utilization is one of the most significant factors affecting your score, yet it remains widely misunderstood. Let’s break down everything you need to know about credit utilization, from its basic definition to advanced strategies for optimization…
Credit utilization, defined
Credit utilization, also known as the credit utilization ratio (CUR), represents the percentage of your available credit that you’re currently using. It’s calculated by dividing your total credit card balances by your total credit limits and multiplying by 100.
For example, if you have $2,000 in credit card debt across cards with combined limits of $10,000, your credit utilization ratio would be 20%.
Why credit utilization matters
Credit utilization typically accounts for about 30% of your FICO credit score, making it the second most important factor after payment history. This significant weight means that managing your utilization ratio effectively can have a substantial impact on your overall creditworthiness.
Impact on credit scores
Let’s boil down the basics on how credit utilization affects your score:
High utilization (generally above 30%) can signal financial stress to lenders.
Low utilization suggests responsible credit management.
Zero utilization isn’t necessarily ideal, as it may indicate inactive credit accounts.
Types of credit utilization
These are the main variations to be aware of:
Per-card utilization
This measures the usage ratio on individual credit cards. Even if your overall utilization is low, having a single card near its limit can negatively impact your credit score.
Overall utilization
This considers the total balance across all your credit cards compared to your total available credit. Lenders often view this as a more comprehensive indicator of credit management.
The 30% rule debunked
While many credit advisors recommend keeping utilization below 30%, this isn’t a hard threshold. Research shows that consumers with the highest credit scores typically maintain utilization ratios below 10%. The relationship between utilization and credit scores is generally linear – lower utilization correlates with higher scores, even below the 30% mark.
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Strategies for managing credit utilization
Everyone’s financial situation is different. Here are a few methods to consider that might help you manage your CUR:Immediate tactics
Request credit limit increases- Higher limits automatically lower utilization if spending remains constant.
- Most issuers allow online requests for increases.
- Some perform hard credit pulls, so ask about this beforehand.
- Reduces reported balances.
- Can help maintain lower utilization even with regular card use.
- Particularly useful before applying for new credit.
Long-term approaches
Keep old accounts open- Preserves total available credit.
- Contributes to credit history length.
- Maintains lower overall utilization.
- Card issuers typically report balances on statement closing dates.
- Timing payments before these dates can help maintain lower reported utilization.
Common misconceptions
Let’s clarify a few aspects of credit utilization: Myth: Carrying a balance improves credit scores Reality: Maintaining a balance and paying interest does not benefit your credit score. You can achieve excellent credit utilization by using cards regularly and paying them in full. Myth: Closing unused cards helps your credit Reality: Closing cards reduces your total available credit, potentially increasing your utilization ratio and harming your credit score.Special considerations
- Business credit cards: Most business credit cards don’t report to personal credit bureaus unless they’re delinquent, meaning they typically don’t affect personal credit utilization.
- Authorized user accounts: Being an authorized user on someone else’s credit card can affect your utilization ratio, as many issuers report these accounts to credit bureaus.
Credit utilization during major life events
Everyone’s circumstances are unique, but here are some general suggestions that could help you manage your CUR through various transitions:Buying a home
- Aim to minimize utilization several months before applying for a mortgage.
- Consider paying down balances to below 10% for optimal rates.
- Avoid opening new credit accounts during the application process.
Emergency situations
- Having high credit limits provides a financial buffer for emergencies.
- Consider maintaining an emergency fund to avoid relying on credit cards.
- Look into personal loans as alternatives to high credit card utilization.
Tips for optimal credit utilization management
Take your own financial circumstances into consideration as you weigh your options: Set up balance alerts- Monitor spending in real-time.
- Receive notifications when approaching preferred utilization thresholds.
- Maintain awareness of spending patterns.
- Keep utilization well below maximum targets.
- Account for unexpected expenses.
- Consider seasonal spending variations.
- Time applications when utilization is lowest.
- Consider cards with high initial limits.
- Space applications to minimize credit score impact.
The bottom line
Managing credit utilization effectively requires understanding both its basic principles and nuanced aspects. By maintaining low utilization ratios, monitoring both individual and overall usage, and implementing strategic management techniques, you can optimize this crucial component of your credit score. Remember that credit utilization is fluid – it can be improved relatively quickly compared to other credit factors, making it a powerful tool for active credit score management.There’s always JG Wentworth…
If you have $10,000 or more in unsecured debt there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
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* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.