Your FICO score takes several factors into account, and your credit utilization ratio is one of the most important factors that can determine your creditworthiness.
If you are wondering how long it will take to improve credit score and other factors, understanding how credit utilization works is crucial to using it to your advantage.
Read on to learn more about this financial term so you can make changes and learn how to improve or remove the contents of your credit report.
Credit usage defined
The ratio of your current outstanding balance on your credit card to the actual credit card limits is called credit usage. This formula looks at the available credit you have with the credit you currently use. Knowing this number can also play an important role in determining your budget.
An example of credit usage is if you have a credit card limit of $ 1,000 and you currently have a balance of $ 300; your occupancy rate is 30 percent. Suppose you add more charges to the same card and your balance is now up to $ 500. This means that your occupancy rate has now risen to 50 percent.
Creditors look at your occupancy rate to determine whether or not you are smart with your money. The higher your credit card balance is in relation to your available credit, the higher your occupancy rate and the less favorable you appear to creditors.
FICO takes several factors into account when calculating your score, such as payment history, credit length, and how many credit questions you’ve had. Your credit utilization accounts for a whopping 30 percent of your score.
How to keep your occupancy rate low
You want to keep your usage of all your credit cards low. To do this, you need to list your debts and your current available credit for each card.
Transfer some of your balance to another card for more even usage. You can also start paying off debt and your bad credit loans in Utah using the snowball method or some other smart strategy so that your balance is generally lower.
The less money you spend with the available credit you have, the better your occupancy rate will be. Some consumers prefer to use the AZEO method, which means that all balances are zero except for one card.
If you absolutely must use credit, try your best to spread your expenses across different cards. Ideally, you should not use credit cards for purchases unless necessary. The goal is to have more cards with low or no balance than those with rolling balances whenever possible.
If you can’t control your credit card balance, you can even ask your credit card company to increase your credit limit. While this may not be an easy option and depends on several factors such as your income, credit history, if nothing works, you can at least try it.
Improve your credit with lower occupancy rates
When you ask how long it takes to improve a credit score, the answer can vary widely. Keeping your credit usage low can help you increase your scores more quickly.
You can think about bringing your credit usage to 0 percent. Having a zero ratio can also mean not using your available credit. But you shouldn’t strive for that. Using your credit cards in moderation and keeping your credit utilization ratio no more than 30% can give an excellent boost to your credit card score.