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.

 

 

What NOT to do When Buying a Car

buying a car

Whether it’s your first time buying a car or not, here’s a list of the things you should avoid before buying a car.

Don’t Spend More than you Have

Being able to budget well is a really important skill to possess – especially when it comes to keeping your own financial situation in check. Buying a car is a big investment. You can’t just cross your fingers and hope you’ll be able to make your payments each month.

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So You Bought a Lemon

bought a lemon

You’ve just shelled out thousands of dollars for a new car. You’ve been assured by the dealership that it’s a fantastic vehicle and you won’t have any problems. But then you’re driving your kids to school and your car just … stops working. Or even worse, you’re on the highway on the way to work and your car breaks down apropos of nothing. The worst case scenario for every new car owner has come true for you. You bought a lemon.

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Buying Used and Saving Money

car should you buy

When it’s time to purchase a new vehicle, one of the first things you need to think about is whether you are going to buy used or new. Depending on your needs and your budget, either choice can be the right one for you. But here’s a money saving tip, buy used cars if you are confident in your ability to find a good model and you will walk away with a lot of savings. including your payment on your car loan.  Here are a few of the advantages of purchasing used vehicles.

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Finding The Best Car For Your Needs

car

Everyone has a dream car, but many people don’t ever see that dream realized. Luckily, getting your dream car may be easier than you’ve previously thought, because auto loans can make it attainable. There are lots of things to consider when you’re looking at your options for loans, but it’s important that you keep things as simple as possible to keep yourself from getting overwhelmed. Here are some things to keep in mind as you go through this process.

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