Credit Series: Debt Usage

This is the third part of my Credit Series, where I explain the most important aspects of credit, credit reports, and credit scores. Each installment focuses on one factor influencing credit, tools to monitor and improve credit, or an explanation of a specific credit concept.

Debt usage accounts for 30% of your credit score. It measures your ability to use your credit responsibly and avoid high balances. The main way debt usage is measured is through utilization. This is calculated as the percentage of total credit limits that you are currently using. For example, if I had a credit limit of $10,000 and had balances of $2,000, my credit utilization would be 20%. In general, the lower the utilization the better. Some people think that as long as you keep your utilization below 50%, your score will not suffer, but really a lower utilization indicates responsibility. In general, the lower the utilization score, the higher the credit score.

Some people recommend closing credit credit cards if your are not using them. However, closing an account will cause your utilization rate to increase. Using the previous example, if I closed a credit card with a $5,000 limit, my utilization would just to 40%. Keeping old accounts open will have a positive effect on your utilization. Some people choose to cut up the card to prevent it from being stole, but will leave the account open so the credit limit can help your score.

There are several ways to keep a low utilization rate. Here are a few strategies:

  • Increase your credit limits. By asking your credit card company to raise the limits, you will have more available credit and the amount you spend will remain unchanged while the amount you have available will increase. Call up and ask for an increase. This is beneficial if they only do a soft pull on your credit, but a hard pull might have consequences that outweigh the advantages.
  • Pay off your balance halfway through the month. By doing this, you are constantly keeping your rate low. Instead of ranging from 0 to $1,000 on your credit each month, you will range from 0 to $500, so at any given point, you will, on average, have half as high of a balance on your account.
  • Some people suggest opening a new account to gain extra borrowing power. However, I strongly advise against this because, while your utilization rate will decrease, opening new accounts could have negative impacts on your credit score.

Debt usage is an important part of your credit score, but hopefully you now have a better understanding of what it is and how you can positively affect it.

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