Credit utilization has to do with the amount of your credit that you’re using, and it’s one of the factors that determine your credit score. Your credit card balance can affect your score, but so can how much debt you have relative to all the available credit limits on your cards. In other words: if you only use one card or even several cards with low limits, it won’t matter as much as if you use a bunch of cards and max out their monthly limits.
What Is Credit Utilization?
Credit utilization is the amount of credit you use compared to the amount of credit you have available. It’s an important factor in calculating your credit score, which lenders use to determine whether or not to give you a loan, loan terms, and more.
You may wonder how this works when there are different types of cards with different rules for using them. Well, there are two main types: charge cards and revolving credit cards.
How Much Credit Do I Have to Utilize?
The credit utilization ratio is the amount of your balance that you have used. The lower the number, the better. Having a high credit utilization rate can hurt your credit score, so it’s important to maintain a good balance here.
Credit card types
Here are the main credit card types you should know about:
- Signature cards – This is one of the most common cards and offers greater rewards than other cards because they require no annual fee and have higher limits than regular credit cards. However, this type has lower limits compared to premium cards. It requires you to put down collateral (like an auto title or property deed) as security against potential damage done if you fail to pay off what you owe at some point during billing cycles.
As per the experts at SoFi, “If you’re prone to carry a balance month to month, you might want to consider a low-interest card. While these types of credit cards don’t come with bells and whistles like airport lounge access, it is the financially prudent option if you have an irregular income or you carry a balance each month.”
- Premium Cards – These are higher-end versions of signature cards that usually come with an annual fee attached but offer more benefits such as travel insurance or concierge services in exchange for their costliness (and they typically charge interest if not paid off in full each month). They also tend not to be allowed at certain establishments where only basic signature models work well enough (such as fast food restaurants).
How Can I Improve My Credit Utilization?
The first rule of maintaining healthy credit utilization is to pay off your credit card. This means you’re not paying interest or finance charges on what you owe, which can significantly affect the amount of time it takes to pay off your balance. If you have several cards and only one with a huge balance, call the creditor and ask them how they can help with this situation. The best option would be to reduce their interest rate or extend the repayment period so it isn’t as long as originally promised. Still, other options may be available to keep things manageable without increasing your debt load even further.
As you can see, there are many ways to improve your credit utilization and ensure it’s in a healthy range. This article helps to know more about that.
Also read – 5 Online Games That Can Help Curve Your Boredom