Improve Your Financial Health with a Good Credit Utilization Rate
As we begin to resume more of our everyday activities following the coronavirus pandemic, we still need to watch not only our physical health but also our financial health. One of the easiest ways to maintain your financial wellbeing is to keep tabs on your credit utilization rate.
What is a Credit Utilization Rate?
Simply put, credit utilization rate is the percentage of your total available credit being used. For example, if your credit limit is $2,000 across all credit cards and your total combined balance is $500, then your credit utilization rate—or credit utilization ratio—is 25 percent. But how do you know if your credit utilization rate is good or bad?
An Ideal Credit Utilization Ratio
While there is no magic number for the ideal credit utilization ratio, financial experts generally recommend that you keep the rate no higher than 30 percent. Using the example of a $2,000 credit limit across all your credit cards, that means you should aim to carry a balance of no more than $600 in any given month.
Why Credit Utilization Rate is Important
Keeping your credit use at a modest percentage of your available limit is important to your credit score. A good credit score is the key to receiving approvals and favorable rates when applying for a car loan, mortgage, or other financial products. Several factors determine a credit score—such as income and length of employment—but your credit utilization ratio indicates whether you use credit responsibly without overspending.
How to Keep Tabs on Your Credit Utilization Ratio
There are several ways to keep track of your credit utilization rate. The easiest way is to collect your credit card statements at the end of the month, add up the balances, and then divide the total balance by the total credit limit. Your primary bank may offer online personal finance tools to track your accounts from outside the bank, and there are free personal financial management websites available as well.
What to Do if Your Credit Utilization Rate Increases
If your credit utilization rate goes above 30 percent once or twice a year, it is unlikely that your credit score will drop dramatically. But if you find the ratio regularly exceeding 30 percent, the first thing to do is to pay down debt by making more than the monthly minimum payment if possible. You might also consider applying for an additional credit card to increase your total credit limit. If you maintain the same spending level, then your utilization percentage will decrease with the higher limit.
One final piece of advice: Try to spread your spending across your credit cards rather than hitting the limit on one card. Maxing out a credit card could hurt your credit score even if you have a low utilization rate on your other credit cards.
For many Americans, retail therapy is one way to relax and ease stress. But as you focus on your physical and mental health, don’t forget to pay attention to your financial health as well.
Looking for more tips on personal financial management or monthly budgeting? Check out more of Comenity’s financial education resources.