What is Credit Utilization? Answer

 

Another follow up to my post on “teaching kids about credit“. Here is an expansion on point #7

What is Credit Utilization?

Credit Utilization is the amount of money being used versus the total amount of credit that is issued. For this example we will use $1000 credit card limit. If a persons balance is $300 then the utilization is at 30%. It is important to know that the credit bureaus cannot be tricked into thinking you have a low utilization level. Just because you pay off your credit card in full every month, the credit card company could have reported your balance prior to paying it off, thus leaving you with zero balance and a utilization level. Credit card companies are able to report balances on any day out of a given month. It is also important to know that it would be wise to keep the utilization level low, as a credit card company can lower your limit at anytime, thus bringing the utilization level up higher than expected. This can also go the other way as well, where the credit limit can be increased, thus bringing the utilization level down.

When utilization is calculated, each separate trade line is calculated separately. When total debt utilization is calculated the complete total of all debt showing on the bureau is calculated, including installment loans.

It is my opinion that the following are the risk levels for Utilization

  1. over limit – very high risk. this can seriously impact a credit score.
  2. 75% – 100% –  high risk. not likely to get approved for new credit
  3. 50% – 74% –  moderately high risk.
  4. 25% – 49% – average utilization. lenders will usually be okay with this when applying for car loan
  5. 10% to 24% – this is considered low when it comes to utilization.
  6. 0 – 9% – their is a difference between 10% and 9%. My opinion would be to keep utilization under 10% to maximize a credit score.

To conclude I would like to mention that credit utilization makes up 30% of a persons credit score calculation. It is very important to keep utilization levels low as 30% of a persons overall calculation is huge.

Just my 2 Cents

-M

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