Credit Utilization and How It Affects You

How much of your credit is available at a given time? When applying for mortgages and loans, a lower credit utilization means that the borrower is not relying heavily on their credit, and also means that they are using their credit wisely.

Basically, the higher the percentage, the higher the risk is involved which will adversely affect your credit score. Remember, your credit score is a big determining factor with most companies, including mortgages, purchasing a car or getting a loan. It’s recommended that your credit utilization is under 30% to positively impact your credit score.

Let’s break it down – so if your available limit on a credit card is $12,000, and your normal balance is $3,000 per month, you have a credit utilization of 25%. For whatever reason, if your available limit was reduced to $6,000, and you have a long history of having a monthly balance of $3,000, that ration would now increase to 50% which would highly likely lower your credit score.

If a borrower uses more than 30% of their available credit, and pay off their bill regularly each month, they should consider making payments towards the balance more frequently (for example every two weeks). This would keep the balance lower, and in many cases the card issuer would only report the credit activity once a month to the bureaus (which normally happens on the monthly closing date of the account).

If they are available, another option is to use multiple cards. Based on the limit of each card, it could result in a lower utilization on each card, therefore raising your credit score.

Plus, you can ALWAYS ask for your available credit to be increased. Assuming that you have a good history of paying on time, this might be a quite easy fix. Before considering this though, ask if it can negatively impact your credit score as it would a hard inquiry on your credit.

If you are trying to improve your score to qualify for a mortgage, consult with a trusted mortgage professional who can advise you specifically for your situation.  If you would like a recommendation, please contact me at thierry@thierryroche.com.

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