What is Credit Utilization?

credit utilization

Payment history is an easy enough term to understand, but what about credit utilization? While you may be familiar with the concept of a credit score and how it’s important to make yours as strong as possible, most people don’t truly understand the key factors that contribute to building and maintaining said score.

There are 5 core factors that credit bureaus take into consideration when calculating your score:

  • Payment history (35%)
  • Credit Utilization (30%)
  • Age of Credit (15%)
  • Mix of Credit (10%)
  • Credit Inquiries (10%)

Payment history carries the highest percentage and the heaviest weight of the 5; if you pay in full and on time, your score will be higher than someone who’s regularly late/delinquent and only makes the minimum payment.

Age of credit and mix of credit are also fairly easy to understand; the longer your account has been open, the better. Additionally, the more varied the types of credit you have access to – you want a a good mixture installment loans (mortgage, auto, student loans etc) and revolving credit (credit cards) – the stronger your score will be.

Credit inquiries refers to how often hard inquiries are made to the bureau regarding your account. Hard inquiries typically come from potential landlords, employers, and financial institutions considering whether or not to extend more credit to you. You can learn more about credit inquiries and the difference between a soft and a hard inquiry here and here.

Which leaves us with Credit utilization. Coming in at 30% of your score, one of the most important things you can do is understand what credit utilization means and how to use it to your advantage; it can make a huge difference in how likely you are to be approved for a loan and how much interest you’ll be expected to pay.

Credit utilization refers to how much of your available credit you actually use vs how much is left over.

For example, if you have a credit limit on one of your credit cards of $1,000 and your balance is $500, you’ve used exactly half of your available credit and your utilization is 50%

The less available credit you use, the better. The credit bureaus and financial institutions want to know that while you use credit from time to time, you’re not reliant on it (which can be a red flag for potential lenders).

So, using the example above, even if you have $1,000 available to you, having a balance of $900.00 (90% credit utilization rate) is actually worse for your score than if someone else with a limit of $2,000 had a balance of $1,000 (50% credit utilization rate).

Even though the other person technically has more debt than you, they also have a higher credit limit which positively affects their utilization rate.

So, what can you do to improve your credit utilization? Start by doing the math. Figure out exactly how much you can charge to your card each month without going above 30 or 40% of your available credit. If you have multiple credit cards, try to spread your purchases across all of them rather than building up one big balance.

If you’re uncomfortable with the idea of using multiple credit cards, another option is to contact your bank and to get a balance raise. Even just raising your limit from $1,000 to $1,500 significantly increases how much you can comfortably charge to your card each month without any negative repercussions to your credit score.



Your Credit Score Dropped. Why?

credit score dropped

It happens to many of us at one point or another; you order your credit report and are stunned to see that your credit score dropped and is notably lower than what you were expecting it to be. So, what happened? And more importantly, what can you do to fix it?  Here are some of the most common reasons:

A Hard Inquiry Occurred

If you’ve recently applied for additional credit or someone pulled your credit file (a lender at a financial institution or a potential landlord, for example), your credit score likely dipped because they created something called a hard inquiry.

Unlike a soft inquiry (which most often occurs when you check your own credit score), a hard inquiry involves a third party requesting a copy of your file and temporarily lowers your credit score. It’s important to note that not all inquiries from third parties result in hard inquiries; an employer checking your credit report during the hiring process will not negatively affect your credit score, for example.

This is why it’s important not to apply for credit from too many places in too short a period of time.  The dip in your score can be disconcerting to see but it shouldn’t actually be a large enough decrease to negatively affect your ability to be approved for credit or other loans.

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Should You Use Credit Monitoring Services?

credit monitoring

Are you concerned about fraud or identity theft? Does the thought of discovering that someone has impersonated you and stolen anywhere between hundreds and thousands of dollars in your name give you anxiety? Then credit monitoring might be an option worth pursuing.

What is Credit Monitoring?

Credit monitoring is pretty much what it sounds like – you enlist one of the various financial companies out there to keep an eye on your credit for you and to loop you in the second there’s a concern or a change to your credit accounts.

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What is Debt Consolidation?

debt consolidation

Do you find yourself 1) drowning in debt 2) uncertain about what payments are actually due when? If you feel like you’re in over your head and could use some serious financial simplification, then debt consolidation might be the right option for you.

So, what is debt consolidation? In the simplest terms, it means taking out a new loan and using it to pay off all of your older debts so you’re left with one loan (into which all the previous debt has been combined).

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Saving Money During the Holidays

saving money during the holidays

Shopping for Christmas presents and other holiday related items can be pretty stressful. We want to do what we can to help you minimize your anxiety this December so we’ve compiled the highlights of some of our favourite posts about saving money during the holidays.

Before The Holidays:

Plan Ahead

Start thinking about the people on your to-buy list as early as September or October. Pay attention to the offhand or throw-away comments they make and make note of the things they express interest in. The sooner you can start getting things here and there/spreading out your shopping, the easier December will be on your wallet.

Establish a Budget in Advance and Stick to It

Ask yourself, ‘How much can I reasonably spend without going into debt or putting myself into a precarious financial situation?’. Whatever that amount is, stick to it. There is rarely a gift that’s worth jeopardizing your own financial stability over.

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