Credit Utilization

Credit Utilization is a major deal, when it comes to applying for a new loan. Whether it be a new credit card, Line of credit, or applying for a car loan in Canada, lenders will look at your total credit utilization when reviewing your application.

What is Credit Utilization?

Credit Utilization is the amount of credit limits(shows high credit on your Equifax) versus the amount of credit you are currently using against your credit limits. For Example: If you have a $1000 credit limit on your credit card and you are currently reporting a $200 balance, this is 20% credit utilization.

In my opinion their are different levels of credit utilization that can affect your credit score. Credit utilization is a large part of calculating a credit score. It is my opinion that going over your credit limits can seriously damage your credit score. I have seen examples where going over your limit, even by $5, can drop a credit score by 25 points. We need to remember that interest is calculated on the balance, so when you use your full credit limit, and decide to make the minimum payment, your interest on the balance might take you over your limit.

Here are the credit utilization thresholds to be aware of:

  1. Over Limit – Can seriously damage credit score
  2. Over 75% Utilization – lenders look at this as a risk- Can affect credit score negatively, especially for those with good credit
  3. Over 50% Utilization – lenders look at this as a high Utilization- Can affect credit score negatively
  4. Over 25% Utilization – considered moderate
  5. Over 10% and under 25% Utilization- considered acceptable and somewhat favourable.
  6. Under 10% Utilization – considered low and favourable when applying for an auto loan

Please Keep in mind that a person with strong credit already, can see a drop in their credit score as their utilization gets higher. The formula used to calculate your credit score will recognize the quality of credit you have, and have had, and score you accordingly when new trends appear to happen. If you are a client with less than perfect credit, high utilization will keep you in a credit position that is not favourable.

-Just my 2 Cents

-M

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