What is a Good Credit Utilization Ratio? – For those who didnt read my previous article on what credit utilization is,ill sum it up in a single para here.Credit Utilization is a ratio between the balance amount you have spent on your card and the total credit limit you re allowed to spend.This total credit limit is set by the card issuer at the time of approving your card application.
Having a good Credit Utilization factor is useful if you want your credit score to be in good standing.This is important if in future you want to avail of a loan on a car or house.Also if you want to apply for another credit card in future,the card issuer might give you a higher credit limit and lower interest rate if your credit report shows you always maintained a lower credit utilization and you were regular on your monthly payments.
What is considered a Good credit utilization
If your credit utilization is in the range of 25-35%,that would be considered a healthy credit utilization.This means,if you have a $1000 limit,then try not to spend more than $250 – $350 on that card.If you have to,then make sure you make payment that month to lower the balance back to the $250-$350 range.
In order to achieve this,you can either use your credit card and run up a balance till about 30% of your credit limit,else you can use it as fluidly as you like,but then adjust your monthly due by paying enough so that the balance is again lowered to the range of 25-35% of the total credit limit.
In your credit card account there is only one variable and one fixed amount.The fixed figure being the credit limit and the variable being the balance/You are in control of the balance and the payouts that directly affect this balance.
This is the best way to juggle the variable amount so as to maintain a good credit utilization.
How to improve your credit utilization
Like i explained above,the best way to improve the credit utilization ratio on your card is to make a substantial payment every month on your card so that the average balance on the card always reflects only a 25-35% usage of the balance.
Another way of getting more to spend on your card and at the same time,maintaining an average of 30% credit utilization,is to ask the card issuer to increase the credit limit.If they increase the limit from $1000 to $1500,you can spend upto $450,instead of $300 on the same card,while still maintaining the same 30% CU.
Effects of a good credit utilization
Your FICO credit score relies heavily on credit utilization.I|t is one of the major contributors to your credit score and accounts for upto 30% of the total score. That’s a BIG chunk of the pie!Almost one third of your credit score is based on your card spending habits and how much balance you rake up,and how much of it you can clear every month.
By lowering your credit utilization,you are giving a positive signal to the credit bureaus that you have a good steady income and have a good repaying capacity.You will definitely score higher in your next report when it is generated.
Another good effect of having a good Credit utilization is that card issuers will have faith in you and offer you higher credit limit on the same card every 2 years or so.Some will even offer to upgrade your card for free!
Loan providers also will take cognizance of the fact that you have the ability to control your expenditure manage debt effectively and pay more than minimum due when required.Because of this,they might even offer you lower interest rats on loans and also a higher loan amount.