While paying your bills on time positively influences your credit score, it’s not the only thing that matters. You might never be late on a payment, and even pay your balance in full each month, but just by carrying high balances on your credit cards on a regular basis, you can be affecting your credit score.

Credit Utilization Basics

A major factor in your credit score is credit utilization, which refers to how your debts compare to your credit limits on revolving accounts, like credit cards and home equity lines of credit. Your credit score looks at two types of credit utilization.

First, it looks at your overall utilization, which you can calculate by dividing the sum your balances by the sum of your credit limits. For example, if you have two cards, with limits totaling $10,000 and $9,000 in charges total, you divide $9,000 by $10,000 to find you’re using 90 percent of your available credit.

Second, your credit score factors in your credit utilization on each account, so if you hit the credit limit on a credit card, you’re using 100 percent of the available credit on that account.

How Much Is Too Much

Using more than about 30 percent of your credit can be damaging your score, depending on the scoring model. But even lower is better, and you have to remember that your score looks at both your utilization on each account and overall.

For example, let’s say you have one card with a $500 limit and another with a $4,500 limit. If you have a balance of $4,500, your overall utilization is 90 percent, which can make you look risky to potential lenders. If that entire $4,500 balance is on your card with the $4,500 limit, you’re using 100 percent of that card’s limit, which could hurt your credit score.

Misconceptions About Paying in Full

Even if you pay your credit card balance in full every month, your credit score might still suffer from high credit utilization ratios. Your balance is usually the amount reported on your card’s end-of-cycle statement, though it can be reported at any time during the month. For example, if you have $750 in charges on a card with a $1,000 limit when the credit card company reports your balance, you’re shown as using 75 percent. It doesn’t matter that your payment isn’t late yet, or even that you will pay it in full.

Preparing for Credit Applications

One way to prepare for a new credit application is to curtail your credit card use for a considerable length of time and pay down your debt as much as possible before you send in your applications. That way, your credit score can be calculated based on balances that aren’t maxed out. Low risk credit applicants are usually eligible for more favorable terms and conditions. To learn more about some credit card options available, visit our Savings Center, which provides a comparison of some of the most popular credit cards in the market today.

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About the Author
Mark Kennan is a freelance writer specializing in finance-related articles. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.