Using credit can be confusing. You create all of these effective spending habits to avoid applying for a credit card, but then you need credit to build a good credit score so that you can get a home, a car, etc. And in order to build credit you have to spend money on your credit card, and pay it back.
We understand how that cycle can be confusing, and that’s why it’s important to understand. In this blog, we’re sharing why what you spend matters when it comes to your credit. The ratio of your outstanding credit balances to your credit limit, also known as credit utilization, makes up 30% of your credit score. This is how it works.
What is Credit Utilization?
Credit utilization measures the amount of credit limit you are using. For example, if you have a credit card with a $1,000 limit and spend $300, your credit utilization is 30 percent. Or if you adding $500 of new charges on your card, you’d have 50 percent. The lower your credit utilization percentage, the better. A low credit utilization shows that you’re only using a small amount of the credit that’s been loaned to you. Credit scoring models interpret a low percentage as “you’re doing a good job of managing your credit” by not overspending. Thus, keeping your spending in check can help you reach a better credit score.
Don’t Max Out Your Credit Card
The higher your balances, the bigger the risk that you will fall behind on your payments. At least that’s what it indicates to prospective lenders. High credit card and loan balances indicate that you’re overextended to prospective lenders. Remember, the purpose of a credit score is to determine the likelihood that you will repay the money you borrow.
How do you manage your credit utilization?
Alerts will be your best friend for managing how much you spend. If you plan on using your credit cards often, you can set up balance alerts to notify you when your balance exceeds a certain preset limit.
Check your billing statement to find out when your next account statement closing date and make sure your balance is low by that date (the date your billing cycle ends). You may also want to take an extra step in finding out when your card issuer reports to the credit bureaus. If your balance is high when the issuers send your account information to the credit bureaus, then the credit utilization used in your credit score will also be high.
What should you do right now?
Take a look at all of the credit cards you currently have, taking into account how much you have spent and your card limits. With this information, you can work to create a budget that allows you to pay at least the minimum (possibly more) to lower the amount you owe. If you have questions about how you can create a budget to lower your credit balances, give us a call at (800) 835-3400. Our team of Member Advisors can sit down with you and share solutions to lowering your credit utilization percentage.