While the actual formula for calculating a credit score has never been revealed by the Federal Trade Commission, we know credit scores are based primarily on credit report information from the credit bureaus. One piece of this puzzle is your outstanding debt, which includes your credit utilization.
What is credit utilization?
Credit utilization is how much credit you are using compared to how much you have available on your credit card accounts. This amount is typically expressed as a percentage and may also be referred to as your credit utilization ratio. For example, if you have a credit card with a $10,000 limit and your current balance is $5,000; your credit utilization ratio is 50%.
Keep in mind that your credit utilization is comprised of the revolving credit card debt on all of your cards and not influenced by other types of loans you may have, for example a home or vehicle loan.
How much does it impact my credit score?
Most experts agree that your credit utilization ratio accounts for 30% of your credit score. Being almost a third of the potential calculation, your credit utilization can have a significant impact on your score and is something you should keep an eye on.
Is there a perfect formula for managing my outstanding debt?
Perfect? No. But, it’s generally advisable to keep your credit utilization ratio at no more than 30%. This means you’re using no more than 30% of your available credit lines across all of your credit card accounts. In addition, keep these tips in mind:
- Track how much you charge each month to get a handle on your credit utilization.
- In addition to tracking how much you charge, know your current limits for each of your credit cards so you can properly calculate your own ratio.
- Set up automatic balance alerts on your cards so you know when you’re getting close to the 30% ratio.
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