How does Credit Utilization Affect your Credit Score?
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How does Credit Utilization Affect your Credit Score?

Moumita Basu

Table of Contents

While applying for a lease, mortgage, Credit Card, or business loan, your credit score is your alchemy. You will be considered a credit risk if you have defaulted on loans or hit the maximum spending limits on your credit cards—you probably aren’t surprised by a low score. However, you might be scratching your head if you are in the vast middle range of “fair” and “good” scores and wondering how to get that coveted ‘exceptional’ credit score.

While reading about credit scores and how they function, you might have encountered a term called credit utilization. It is a pretty important factor that makes up your credit score. Let’s learn how long credit utilization affects credit score

What is the credit utilization ratio, and how is it important?

This is an essential indicator of lending risk. A person constantly charges all the money they can or regularly exceeds the credit limit. In comparison, people who charge smaller amounts are more likely to pay off their balance, representing a lower risk to the lender.

How does credit utilization affect my credit score?

Since there are multiple credit scoring models, it is difficult to calculate how credit utilization will affect your credit scores. But a strong correlation exists between a consumer’s credit utilization rate and credit scores. Those who keep their utilization percentage low have higher scores than those who habitually max out their credit cards. Can we give an example here, with two scores and their scores?

How much does credit utilization affect credit score?

This is an essential indicator of lending risk. A person constantly charges all the money they can or regularly exceeds the credit limit. In comparison, people who charge smaller amounts are more likely to pay off their balance, representing a lower risk to the lender.

How to lower credit utilization?

There are multiple ways to lower your credit utilization ratio, and we will list a few below:

  • Just list the headers below here to improve the chances of getting ranked
  • Make timely payments more than once a month: By maintaining this, your balance will never get too high, and if you pay your credit card bill on time, it can lower your credit utilization ratio
  • Spread your charges across multiple cards each month: Using multiple cards will result in multiple accounts of low credit utilization rather than one account with high utilization. But remember that specific credit-scoring models will look at your overall credit utilization and the credit utilization on individual credit cards, so this technique may not always work
  • Increase your available credit: If your income has increased and you have maintained an excellent credit history with little debt, you should ask for a credit limit increase. But remember that asking for an increase might result in a hard inquiry of your credit


Conclusion

While having too many Credit Cards compared to your overall credit mix might negatively impact your credit score. Additionally, too many credit score checks, especially by new creditors, in a short time can also negatively influence the score. Therefore, based on your existing Credit Cards and their limits, consider the correct number of credit cards you should have based on your financial ability.