According to many financial experts, credit cards are the cornerstone of the American economy. Having and using a credit card is no longer a luxury left to only the wealthy in society. Almost everyone uses one at some point in their life.
There are so many terms that come with credit cards. Have you ever wondered what a credit card utilization rate is?
This article covers everything you need to know about what a credit card utilization rate is and how to optimize it for the best benefits.
Definition
Credit card utilization is the measurement of the available credit you can use. It is the connection between your credit card balance and your limit.
This rate is essential when it comes to your credit score, as it considered your ‘amount owed.’ Generally, it amounts to around 30% in points in your FICO credit score.
Myths
One of the biggest myths that you can find almost anywhere about the utilization rate is that all lines of credit are considered in FICO scores. The metric used is designed to ensure that it can only affect your FICO score when you use your credit card.
Another myth is that if you pay your credit card at the end of each month, you have zero utilization. When it comes to utilization, the one thing that counts is the balance that appears on your card. Even if you pay your card on time at the end of each month and still have a balance, that’s what will count. If you want to keep your utilization at zero, then you have to pay off your credit card in full.
Managing Your Utilization Percentage
Managing your utilization limit can be a tough ask, especially if you frequently use your card. But below are a few ways you can:
- Spread out your monthly purchase charges: If you have a couple of credit cards, then it is best to try and spread out your purchases. Other than straining one card to go over the 30% threshold, spread them out.
- Ask your issuer to increase your limit: In case you change your income stream to a higher amount, you should ask your issuer to increase your rate. Say, for example, you had spent $5,000 on your $10,000 limit card, and you ask for an increase to around, say, $100,000. The change will bring your utilization to about 10%. This will make considerable inroads in regard to your credit score. Note that your lender can, at times, deny your request for added limit.
- Make payments on your card twice per month: If you want to ensure that you have the lowest utilization rate, then try to pay your card at least twice a month. This will mean that you’ll be paying once in the middle of the month and the rest at the end of the month. It will ensure that you can remain below the 30% threshold.
Conclusion
Understanding credit utilization can be challenging. But, if you want to keep up with payments and not fall into dark debts, you should make an effort. Credit utilization is just of the most critical aspects of credit cards that you should keep up with.