Improve your credit rating by monitoring your credit utilization rate

There are a number of best practices to follow when working on improving your credit score, ranging from making sure you pay off your balance on time to being aware of how often you apply for new cards. But the one that can have an immediate impact on your credit score is keeping an eye on your credit utilization rate.

Credit usage is the percentage of your line of credit that you use. For example, if you have $ 10,000 in available credit and put $ 5,000 in purchases on your credit card this month, that represents a 50% credit utilization rate.

It is a major factor in determining your credit score, accounting for up to 30% of your score.

Experts traditionally recommend that you use no more than 30% of your available credit in any given month, and ideally keep it near 10% or less. Indeed, for lenders, seeing a borrower putting a lot of money on his credit card can be a red flag indicating that he will not be able to repay what he owes.

“If you have a heavily used account, that turns out to be an indicator of high risk,” Rod Griffin, senior director of consumer education at Experian, told CNBC. “For most people, if you have a high balance, you are probably more financially stressed. The reason is simply that the higher your balances, the more likely you are to default.”

For most people, if you have a high balance, you are probably more financially stressed.

Rod Griffon

Senior Director of Consumer Education at Experian

Even if you fully intend to pay your bill in full, a high usage rate could lower your score by 50 points in the short term, Griffin says.

Griffin experienced this firsthand. In 2019, he used a credit card to pay for a family vacation, charging it with purchases of fuel, hotels, meals and gifts. Between November and December, his score dropped 40 points due to a higher than usual balance. Once he paid his balance the following month, his score went up.

If you are sitting near different ranges of credit scores – 750 to 799 are generally considered “very good”, while 670 to 739 are considered “good” and 580 to 669 are “average” – it is worth your time. ” be aware of the use of your credit. rate, especially if you plan to apply for credit in the near future.

By paying a percentage of your bill before generating your monthly statement, you can prevent a high usage rate from appearing on your report.

If you normally use 20% of your $ 5,000 in available credit but make a purchase of $ 1,000, say, on a new TV or computer, that drops you to 40%. But paying this before your statement date can prevent your score from being affected.

But if you have a credit score close to 800 or higher, don’t worry too much about a temporary 40 or 50 point ding.

“The only reason to get 850 is if you make a bet with your wife,” says Griffin. “If you are 750 years or older, you will get the best terms and rates [from lenders]. “

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