Robert Palumbo • May 24, 2019
One of the most important factors that determine your credit score is your credit utilization, but many Canadians don’t know what it is! Did you know your credit utilization determines 30% of your credit score? If you’re looking to understand and improve your credit score, you need to pay attention to how much of your available credit you’re using.
Your credit utilization is the amount of credit you have used out of the total amount available to you. The lower your credit utilization, the better.
You can figure out your credit card utilization by dividing your total credit card balances by your total credit card limits. For your total credit utilization, just add up all your cards and lines of credit, including home equity lines of credit, and divide them by your total credit limit.
For example, if the balance on your credit card is $500 and your credit limit is $1,000, then your credit utilization for that credit card is 50%. We recommend keeping your utilization below 30%.
Carrying large balances on your credit cards suggests you’re not able to pay them off in full, which makes it more likely that you might have problems paying your bills in the future. If you’re relying on your credit to cover your regular expenses, once your credit cards are maxed out and the lines of credit are used up, you may not be able to cover your payments.
We recommend keeping your utilization below 30%.We recommend keeping your utilization below 30%. Credit providers and financial institutions will see your low credit utilization ratio as responsible credit use. So if your credit card limit is $5,000 and your balance is $1,250, your utilization is at 25%.
How do I improve my credit utilization?
There are two main ways that you can improve your credit utilization and luckily, they are pretty simple.
1. Minimize your account balances
The best way to improve your credit utilization is by minimizing the balances you owe on your credit accounts. To do this, you should try and pay off your credit card balance in full each month.
If you’re having trouble meeting your monthly payments, you may want to consider a low-interest personal loan. Loans don’t count towards your credit utilization because they’re a form of instalment credit: you’re approved for a set amount, which you pay off through fixed payments over time. Since credit card interest on missed payments usually exceeds 19.9%, you’ll likely receive a lower interest rate on a personal loan and save money in the long run. Check out Borrowell’s loan calculator to see how much you could save.
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2. Increase your credit limit
Another way to improve your credit utilization is to ask your credit card company to increase your credit limit, or you can apply for another credit card. If you can handle credit responsibly without overspending, this is a great option. The goal is to increase the total amount of credit available to you to improve your credit utilization and not to add to any existing debt you may have.
We hope we answered your question, “what is credit utilization” and are happy to answer any other credit-related questions you have. We’d love to hear from you, so tweet us @borrowell!
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