What is credit utilization rate?

There are several ways to improve your credit score, but perhaps none are as easy as improving your credit utilization rate. Credit utilization rate is defined as the ratio of total credit card debts divided by the limit on your credit card. For example, it is suggested that you never have a credit utilization rate over 35%, which would equate to $350 of debt for every $1000 on your credit limit.

Credit utilization rate is a surprisingly important aspect of your credit score. There are several reasons why this is the case. To a credit card company, a high credit utilization rate means that either the person is spending a lot of money, very close to their limit, or that they have a low limit. Both of these are bad things to a credit card company – if you are spending money close to your limit, it means that you may be a risk to exceed your limit. Similarly, if you have a low limit, it says to a credit card company that you may be untrustworthy with a large limit. Both of these inferences lead to a lower credit score.

As a result, one of the best ways to improve your credit score is to keep a watchful eye on your credit utilization rate. It is important that your rate is above zero – companies are afraid of people who do not use their credit cards at all, because it looks like they are not credit worthy – but it is equally important that it is in a manageable range somewhere between 10% and 30%. This way, you can show that you know how to manage your money and credit. Often, credit problems lead to more credit problems when companies see you as a risk, but similarly, benefits can lead to more benefits. If companies see that you can manage your credit utilization ratio, they will see you are safe, and they will be more likely to give you more credit in the future.

Graham Billings

Graham Billings

Graham Billings is a senior at the University of North Carolina at Chapel Hill with a double major in Economics and Political Science. He plans to graduate in December of 2009 and then attend law school in the fall of 2010. He is a member of the Economics Club at Carolina, which brings in speakers and hosts events in order to discuss current economic issues and help those who do not have a background in economics become more familiar with it. He is a National Merit Scholar and Dean’s List recipient. He is originally from Greensboro, North Carolina and attended the Early College at Guilford for high school, taking classes at Guilford College. In addition to economics, his academic interests include the legal and political system. He headed the only student-run, high school-level Honor Court in high school and participated in a national model Congress in San Francisco, run by Harvard students, and won awards of excellence for his work on the mock Supreme Court. Additionally, he tutors Carolina students in economics on a volunteer basis.
Graham Billings

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