Your credit utilization ratio measures how much of your available credit you’re using and has a big impact on your credit score. When you’re close to your credit card limits and apply for more credit, it’s may look like you’re trying to borrow more when you may have difficulty handling the debt you already have.

 

Credit Limit Percentages

Depending on who you talk to, you may get different percentages as to how low your credit utilization should stay. According to Experian, there’s no magic percentage that everyone should stay under, but others like the Chicago Tribune say to stay between 10 and 30 percent of your available credit, with lower percentages being even better. Your utilization ratio only looks at how much you’re using on your credit cards, not other accounts like a car loan, mortgage or home equity line of credit.

 

Types of Utilization

Your credit score looks at both your overall utilization as well as the utilization on each individual card, so having one card maxed out could hurt your score even if your overall utilization is low. For example, let’s say you have three credit cards, one with a $2,000 limit and two with $4,000 limits, for a total credit limit of $10,000. If you only have a balance of $2,000 across all three cards, your overall utilization is 20 percent. But, if $1,800 of that is on your card with the $2,000 limit, you’re using 90 percent of that card’s available credit, which may impact your score.

 

Timing Is Critical

Credit card companies can report your balance at any time during the month, so just because you pay your credit card in full each month doesn’t mean you’ll have a zero-percent credit card utilization. Instead, what shows up on your credit report is whatever your balance was on the day the credit card company reported. For example, say you charged $3,000 on your credit card in August and the payment is due on September 30. If you don’t pay until September 29, but the credit card company reports you balance on September 15, your report shows a $3,000 outstanding balance, even though it’s not due yet.

 

Applying for Loans

When you’re planning to apply for an interest-sensitive loan, such as a car loan or mortgage, consider taking extra steps to limit the amounts owed on your credit cards so that your credit report looks as good as possible when you apply for the loan. One way to have a zero balance show up on your report is to pay in full and not make any additional charges during the following billing cycle. If you take a month or two off from using your credit cards and use cash or debit cards instead, it might be a bit of a hassle, but it could save you in the form of a lower interest rate.

 

 

About the Author
Mark Kennan is a freelance writer specializing in finance-related topics. He has worked as a sports editor and published articles on a number of online outlets.

 

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.  © 2014 ConsumerInfo.com, Inc.  All rights reserved.