What are Utilization Rates and how do they affect your credit score?

Credit cards and credit limits can be difficult, if not impossible, to understand. What affects your credit score? What bad habits should you avoid when borrowing or applying for a new line of credit? Most importantly, what are utilization rates and how can they affect your credit score. Here are a few things to keep in mind when applying for a new credit card or expanded credit limit.


What is a Utilization Rate?

Utilization rate is a fancy term for the balance-to-credit-limit ratio on your credit report. In a nutshell, this means that to determine credit risk and whether or not they will offer you a new or expanded line of credit, banks and credit card companies compare your credit limit to the amount of money that you keep in your balance.

To determine this ratio yourself, simply divide your current balance by the total credit limit for that account. For example, if you had a credit card in your wallet with a $500 limit and you maintain a $300 balance on that card, your utilization ratio for that card would be 60%. To calculate your total utilization ratio, simply compare all of your total balances with your total credit limits.

Why is utilization rate important?

A high utilization rate, such as the one that is mentioned above, can indicate that the borrower is dealing with financial difficulties. Such users tend to run up their credit balance paying bills and handling other necessities, without the income to pay off the majority of the balance.

A high utilization rate can also damage a borrower's credit score, and make it harder to get new or expanded lines of credit. Banks and credit card companies don't like to give credit to borrowers who may not be able to repay it, after all.

What's the best utilization rate to have?

The website VantageScore recommends maintaining an overall utilization rate of less than 30%. The lower the overall utilization rate, the better.

How can I lower my utilization rate?

There are a variety of ways to lower your overall utilization rate.

Not only will these techniques help to improve your utilization rate, but they can also help to improve your credit scores.

Why don't I have a credit history when I've got several credit accounts already open?

Having no credit history is almost as bad as having a bad credit history. Banks and lenders will often refuse to loan money or extend credit to anyone without a credit history. This most often affects young adults who are getting their first credit card or applying for their first car loan.

If you have a number of accounts already open, it is important to make sure that these accounts are being reported to the credit agencies. You can obtain a free copy of your credit reports from each of the major credit agencies, Trans Union, Experian, and Equifax, once a year either by accessing their websites or contacting the agencies directly by phone or mail.

If you apply for a credit card or line of credit and your application is declined, you are also entitled to receive a copy of your credit report for free from the lending company.

If your existing accounts are not showing up on your credit report, the first thing you need to do is contact the lender. Creditors are not required to report your account information. If the companies that you have opened your accounts with have chosen not to report your information to the major credit agencies, then you simply have no credit score. You will have to work on establishing a credit history with authorized accounts.

Look into cards that specifically state that they report to one or more of the credit agencies. If you don't qualify due to a low credit score or poor credit history, try applying for a secured credit card through your local bank branch. These accounts require a deposit to create a credit line, but they do still report to the major credit agencies, making it easy to build your credit.

If you have a spouse or parent who is willing to cosign on a loan or credit application, you may be able to qualify for a more expansive credit line. As long as all of your payments are made on time and the account is maintained, the cosigned account will help to build your credit history as well.

How long do closed accounts stay on my credit history?

When you close a credit account, it doesn't just vanish, but it is important not to have too many open accounts on your credit report at one time. If you have a great variety of accounts, it can drag down your credit score, making it more difficult to qualify for loans.

Closed accounts can stay on your history for up to 10 years, but it is important to make sure that they are being reported as closed. If the account is still reported as open, even if it has a zero balance, it can damage your credit score. It can be beneficial to your utilization ratio, but there's a fine line between a good ratio and too many open accounts.

If you have any negative marks on your account after it has been closed, it will often disappear faster than if it was a positively maintained account. Accounts with negative information will be closed after 7 years. This makes it easier to improve your credit report if you've had problems maintaining your credit score in the past.


Hopefully this has answered a few of the questions you might have about credit scores and utilization ratios. Go out there and spend that credit wisely!