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Understanding Credit Card Utilization and Its Impact on Your Credit Score

At O1ne Mortgage, we understand the importance of maintaining a healthy credit score. If you have any mortgage-related needs, feel free to call us at 213-732-3074. In this article, we will explore how credit card utilization affects your credit score and provide tips to manage it effectively.

How Long Does High Credit Card Utilization Impact Your Credit Score?

High credit card utilization can negatively impact your credit score as long as your balances remain high. Once you pay down your balances and your card issuer reports the lower utilization to the credit bureaus, you could see an improvement in your scores within 30 days. Credit scores are sensitive to your credit utilization ratio—the amount of credit you’re using relative to your total credit limits. The lower your utilization, the better for your credit score.

How Credit Utilization Rate Affects Credit Scores

Credit card utilization is the portion of your credit card limit that is in use. It is a significant factor in calculating “amounts owed,” which makes up about 30% of your FICO® Score. FICO® Scores are used by 90% of top lenders, making it an important consideration.

You can calculate your credit card utilization by dividing your card’s balance by its credit limit. Overall credit utilization is the sum of your total credit card debt across all cards divided by the sum of your credit card limits and multiplied by 100.

Tips for Decreasing Your Credit Utilization Rate

Whether a score algorithm uses the most recent balance reported or trended data, keeping your balances low relative to credit limits can help your credit score. Here are some tips to manage your credit card utilization:

• Pay down credit card balances: Lower balances relative to credit limits translate into lower credit utilization. Enact a plan to pay off your credit cards, and your scores will likely improve over time.
• Ask for a credit limit increase: This works best if the credit card is not brand new or if your income has increased. It may also result in a hard inquiry on your credit report which could ding your score by a few points. Before you ask your card issuer for a limit increase, check your credit score.
• Apply for a new credit card: A new card will increase your overall credit limit. If your credit card debt does not change, that can help reduce your utilization.
• Consolidate your credit card debt: A debt consolidation loan could help you lower your credit card utilization by reducing the amount you owe on credit cards. However, you still owe about the same amount of money. Another advantage of a debt consolidation loan is you may pay less interest on what you owe. Just be sure you don’t run up your credit card balances after taking on the loan, or you could end up in a worse situation.
• Keep credit cards open: Unless you have a compelling reason to close your credit card accounts, keep them open. They contribute to both your overall credit limits and the average age of your credit accounts, a minor factor in your credit score. If you are trying to avoid an annual fee, ask the issuer if you can switch to a card that doesn’t have one.
• Consider paying early: If a low credit limit results in high utilization, consider paying early. Once a charge posts, you can typically pay it off online. You don’t have to wait for a statement, and paying early can help you avoid a high utilization on your credit report.

The Bottom Line

With most credit scores, any damage from high credit card utilization goes away when credit bureaus have up-to-date information on your new, lower balances. However, it’s still smart to make a habit of keeping balances relatively low. Newer scores using trended data look back at up to 24 months’ worth of balances and payments, so routinely controlling the balances can be beneficial. The use of trended data also means that a spike in balances that occurs in a pattern (such as during the holidays) won’t have as much impact.

At O1ne Mortgage, we are here to help you with all your mortgage-related needs. Call us at 213-732-3074 to speak with one of our experts today.

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