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Understanding Credit Utilization with O1ne Mortgage

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding your credit utilization. For any mortgage-related needs, feel free to call us at 213-732-3074.

What Is Credit Utilization?

Your credit utilization ratio is the percentage of available credit that you’re using on revolving credit accounts, such as credit cards. Understanding how utilization is calculated, which accounts are included, and how to lower your utilization can be crucial for maintaining an excellent credit score.

Key Points to Remember:

• Utilization is the percent of your available revolving credit that you’re using.
• Calculations are based on the information in your credit report, not an account’s current balances.
• Lower utilization ratios are best for your credit scores.

Which Accounts Factor Into Credit Utilization?

Credit utilization applies solely to revolving credit accounts, which can include:

• Credit cards
• Personal lines of credit
• Home equity lines of credit

Installment loans, such as personal loans, student loans, mortgages, and auto loans, are not part of credit utilization. The amount you owe on these accounts relative to the initial loan amount can affect your credit scores, but not your credit utilization.

How to Calculate Your Credit Utilization Rate

Most credit scores calculate credit utilization using the balance your credit card issuer most recently reported to the credit bureaus and the credit limit reflected on your credit report. Here’s how you can calculate it:

Calculating Individual Revolving Account Utilization

1. Find the card in your credit report and identify the account’s most recently reported balance and credit limit.
2. Divide the balance by the credit limit to get a decimal.
3. Multiply the decimal by 100 to get a percentage.

Calculating Overall Revolving Credit Utilization

1. Add the account balances and credit limits from all revolving credit accounts.
2. Divide the sum of the balances by the sum of the credit limits.
3. Multiply the result by 100 to find the percentage.

How to Reduce Your Credit Utilization Rate

Improving your credit score can be achieved by lowering your overall utilization ratio and the utilization ratio of individual accounts. Here are a few strategies:

• Make fewer credit card purchases to lower your balances.
• Make early credit card payments to reduce your balance before it’s reported.
• Increase your credit card limits by asking your card issuer.
• Apply for new credit cards to increase your overall available credit, but be cautious as new accounts can affect your credit scores in other ways.

Maintaining a higher amount of overall available credit can be beneficial, so you might not want to close credit cards or lines of credit, even if you don’t frequently use them. However, consider closing cards with an annual fee or switching to a no-fee card.

For any mortgage-related needs or further assistance, call O1ne Mortgage at 213-732-3074. We’re here to help you make informed financial decisions.

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