There are so many terms that come with credit cards. Have you ever wondered what a credit card utilization rate is?
According to many financial experts, credit cards are the cornerstone of the American economy. Having and using a credit card is no longer a luxury left to only the wealthy in society. Almost everyone uses one at some point in their life.
With credit cards, though, come many terms that are attached to spending. Words like utilization rate are among many others that you may have come across and wondered just what they mean. To answer your question on the credit card utilization rate, read on.
In its simplest form, credit card utilization is the measurement of the available credit you can use. Or, it is more or less the connection of your credit card balance and your limit. This rate is quite essential when it comes to your credit score, as it is what you can also refer to as your ‘amount owed.’ Generally, it amounts to around 30% in points in your FICO credit score.
One of the biggest myths that you can find almost anywhere about the utilization rate is that all LOC are considered in FICO scores. The metric used is designed to ensure that it can only affect your FICO score when you use your credit card.
Another myth is that if you pay your credit card at the end of each month, you have zero-utilization. When it comes to utilization, the one thing that counts is the balance that appears on your card. Even if you timely pay your card at the end of each month and still have a balance, that’s what will count. If you want to keep your utilization at zero, then you have to pay off your credit card in full.
Managing Your Utilization Percentage
Managing your utilization limit can be a tough ask, especially if you frequently use your card. But not all hope is gone; this is something that can be done.
Here are a few ways how.
- Spread your monthly purchase charges: If you have a couple of credit cards, then it is best to try and spread out your purchases. Other than straining one card to go over the 30% threshold, spread them out.
- Ask your issuer to increase your limit: In case you change your income stream to a higher amount, you should ask your issuer to increase your rate. Say, for example, you had spent $5,000 on your $10,000 limit card, and you ask for an increase to around, say, $100,000. The change will bring your utilization to about 10%. This will make considerable inroads in regards to your credit score. Note that your lender can, at times, deny your request for added limit.
- Make payments on your card twice per month: If you want to ensure that you have the lowest utilization rate, then try to pay your card at least twice a month. This will mean that you’ll be paying once in the middle of the month and the rest at the end of the month. It will ensure that you can remain below the 30% threshold.
Understanding some of the terms in use with regards to credit cards can be challenging. But, if you want to keep up with payments and not fall into dark debts, you should make an effort. Credit utilization is just of the most critical aspects of credit cards that you should keep up with.