When it comes to maintaining a good credit score, understanding what factors contribute to it is key. One of the most influential elements of your credit score is credit utilization—and if you’re carrying a balance on your credit cards, it could be dropping your score by over 100 points. But here’s the good news: You can easily improve your score by keeping your credit utilization at the right level. In this blog, we’ll break down how your debt affects your credit score, and give you actionable tips on how to improve it.
What is Credit Utilization, and How Does It Affect Your Credit Score?
Your credit score is calculated based on several factors, and one of the most significant is your credit utilization ratio. This ratio makes up 30% of your total credit score, which means it has a big impact on whether you have a good or bad score. So, what exactly is credit utilization?
Credit utilization refers to the amount of credit you’re using compared to your total available credit. It’s calculated by dividing your total credit card balances by your total credit limits. For example, if you have a $1,000 balance on a credit card with a $5,000 limit, your credit utilization ratio would be 20% ($1,000 ÷ $5,000).
Why High Credit Card Debt Can Hurt Your Score
Many people believe that just having a large loan balance—such as a car loan or mortgage—affects their credit score in the same way as credit card debt. However, loan balances do not directly affect your credit utilization ratio. It’s credit card debt that can significantly impact your score.
If your credit card balances are high relative to your available credit, you’re likely to see a drop in your score. In fact, credit utilization is one of the most important factors in your credit score—and it’s also one of the most overlooked. A high utilization rate can lower your score by over 100 points, which could be the difference between qualifying for a loan with a good interest rate versus getting stuck with a high APR.
The Secret to a Higher Score: Keep Your Credit Utilization Below 10%
So, what’s the magic number when it comes to credit utilization? Most experts agree that to maintain a healthy credit score, you should keep your utilization rate at 10% or less. This means if your total available credit is $10,000, you should aim to use no more than $1,000 of that credit.
How to Calculate Your Credit Utilization Ratio
Here’s how you can calculate your own credit utilization ratio:
- Add up your credit card balances: Look at all your credit cards and add up the balances. Make sure you include every card, even if the balance is $0.
- Add up your total credit limits: Now, add together the credit limits for all your credit cards.
- Divide your balance by your limit: Take your total balance and divide it by your total credit limit. Multiply that result by 100 to get the percentage.
For example:
- Credit card balance 1: $1,500
- Credit card balance 2: $2,000
- Credit card balance 3: $1,000
- Total balance = $4,500
- Total credit limit = $15,000
Credit Utilization = $4,500 ÷ $15,000 = 0.30
Credit Utilization Ratio = 30%
If your utilization ratio is over 30%, it may be time to make some changes to improve your score.
Why Monitoring Your Credit is Essential
To maintain a good credit score, it’s important to keep track of both your credit utilization and your overall credit health. If you want to stay on top of your credit and prevent any surprises, using credit monitoring services can be a game-changer. These services alert you to any significant changes in your credit report and help you track your progress over time.
I recommend checking out these trusted credit monitoring services to help you stay informed:
These tools will give you a clearer picture of your credit health and keep you on track as you work to improve your credit utilization ratio.
Building Credit the Right Way
If you’re looking to rebuild or establish your credit, you might want to consider using credit builder accounts. These are specifically designed to help people with no credit or poor credit build a positive payment history, which in turn can improve your credit score.
Consider exploring Credit Builder Card or Self. to start building your credit in a way that will positively impact your score.
Final Thoughts
While high credit card debt can significantly damage your credit score, you don’t have to stay stuck with a low score. By keeping your credit utilization below 10% and using tools like credit monitoring and credit builder accounts, you can take control of your financial future.
If you’re unsure where to start, consider signing up for a credit monitoring service or using a credit builder account to give yourself a head start on improving your credit. Remember, your credit score doesn’t have to be a mystery, and with the right tools, you can begin to improve it today!
Ready to Improve Your Credit?
If you’re looking for additional ways to build your credit, check out the resources above. Stay informed, stay proactive, and watch your credit score rise!