RE Credit Fix, LLC | Chandler Credit Consulting

Keys To Managing Your Credit Card Utilization Ratio

Your credit card utilization ratio is the difference between the amount of debt you owe on a credit card versus the credit limit the bank authorized for you based on a percentage. For example:

If your credit limit is $5,000 dollars and you owe $2,500 on the card, your current utilization ratio is 50%.

Your credit card utilization ratio accounts for 30% of your total credit score, which makes it the second highest factor the credit agencies take into account when looking at your credit. Maintaining low utilization ratios on credit cards can make a hugely positive impact on your credit score. However, unlike derogatory payment histories, not everyone knows how to ensure their utilization ratio is a positive force on their credit score. Here are a few tips for you to make sure your utilization ratio is NOT adversely impacting your credit scores:

Keep Your Credit Cards Open And Active

Just because you have a credit card does not mean you have to use it regularly or maintain a balance. Keep all of your accounts open and if need be make a small purchase on the card (such as a tank of gas) and pay the balance in full when the statement arrives to ensure the account remains active.
NEVER close credit cards if you can avoid it. The more cards you have open, the higher your total available credit limit. Credit calculating software takes your TOTAL available credit versus TOTAL debt into account. Closing a credit card will decrease your overall available credit ratio without decreasing your debt. Therefore, even if you are not using the credit card - DON'T CLOSE THE ACCOUNT.

Know Your Limits

Keep the balances on your credit cards as low as possible. Aim to keep all of your balances below 20% of the available credit limit on that card.
The FICO software ranks your credit debt based on all of your utilization ratios. If your credit card debt is more than 70% of your credit limit, it will cause serious damage to your credit score.
If you are over the limit on your credit card the adverse impact on your credit score increases substantially from the above. If your card(s) are over the limit the best thing you can do to immediately improve your credit score is pay them down below the available limit and then work toward that 70% threshold.

Check Your Credit Report Regularly

Look at your credit report to ensure the credit card companies have accurately reported your credit limit(s). If they haven’t reported your limits, the FICO software will read all of your cards as maxed out which as stated above is hugely adverse and detrimental to your credit scores.
Report any errors on your credit report immediately.
Maintain communication with your credit card company. Call them if there are suspicious charges on your account or if you need to make adjustments to your payment schedule.
Request regular credit line increases. Remember the higher the available credit limit, the lower the ratio.

By maintaining low credit card utilization ratio, you ensure your credit score is being maximized within this credit scoring category. Keep in mind this area accounts for 30% of your credit score so it is very important to diligently manage your credit cards. While a solid debt ratio alone is not the only element involved in the calculation of your FICO score, it is significant and can make the difference in qualifying for a loan or being able to secure other types of financing.