Why Should You Care About Your Credit Utilization Rate?

closeup of a credit card

In a perfect world, all homeowners have sufficient cash reserves for purchasing replacement windows, building new decks, or constructing inground pools in Utah. In reality, though, most of us lack the finances to fund a home project.

If you are an average Utahn who do not have tens of thousands of dollars lying around, you most likely need to rely on your credit to afford a home improvement when you want (or need) to tackle one. That being said, you ought to pay close attention to your credit utilization rate, which is the second-most influential component of your FICO scores.

To advance your knowledge of it, below are the key things you need to know about it.

It Shows Whether You Use Your Credit Cards Properly

Your credit utilization rate is the percentage of how much of your available credit you actually use. In FICO’s book, the ideal maximum amount of credit you should consume per month is 30%. Going above the threshold will result in a point deduction, the severity of which depends on how close you are to maxing out your total credit limit.

In other words, the majority of your available credit exists just for temptation. Credit card issuers give you more than what they want you to use to see how responsible you are as a consumer. Although having a credit utilization rate of over 30% negative impacts your FICO scores, its bad effect can be fleeting if you do not do it often. Also, your credit will not suffer as much if you pay your monthly bill in full and on time.

It’s Not Dictated by Installment Loans

Only revolving lines of credit are factored into your credit utilization rate. Any installment loan you have will not increase your credit limit nor raise your balance-to-limit ratio. However, taking out a loan to consolidate your credit card balances and eliminate them all can positively improve your credit utilization rate. This scenario is one of the few examples where replacing debt with another debt is beneficial.

man checking his credit score on the laptop

It Shouldn’t be Manipulated by Opening Many Credit Accounts

Naturally, your total credit limit will go up the more credit cards you have. But, then again, opening too many accounts can backfire on you. They can reduce your overall credit history age, which can make you appear as a less experienced credit user. Each credit card application triggers a hard inquiry, an activity that knocks some points off FICO scores.

It Can Be Decreased Without Spending Less

If you want to keep your credit utilization rate low without altering your spending habits, ask for a higher credit limit. With proper timing, your credit card issuer may grant your request. When should you ask for a credit limit boost without getting denied? The best times are when you have created a stellar payment history, when you just received a raise, and, frankly, when you are not planning to make a big purchase or go on a spending spree soon.

It is imperative to know exactly your credit utilization threshold in dollar amounts. This way, you can determine when to stop using your plastic for the month and stay below magic number 30 without making the extra effort.