What is Credit Utilization and Why is it Important?
Credit utilization is defined as the percentage of the available credit that has been borrowed. Credit Utilization is important because it comprises 30% of your total credit score. If your credit utilization is too high (maxing out or getting very close to your credit limit repeatedly), FICO views it as not being able to handle debt responsibly. Therefore, maintaining low credit card balances will benefit you in the long run. FICO states that people with the best scores usually have an average credit utilization of less than 6% with 3 accounts carrying balances.
How to calculate your Credit Utilization?
Calculating your credit utilization if fairly simple, and can help manager your credit balances. Before calculating your credit utilization, you will need your latest credit card billing statement (in order to calculate your total credit utilization, you will need to use all of your previous credit statements, but for this, we will only use your most current). You will then need to locate you current balances (what you've spent) and your credit limit (what you are able to spend) on your current statement. You will then divide your credit card balance by your credit limit -- then multiply by 100 to calculate your credit utilization as a percentage.
For example, if your credit balance is $600 (you have $600 left to pay off on your credit card) and your credit limit is $1000 (the most you can spend on that credit card is $1000), you would divide 600 by 1000 to get .6 -- multiply by 100 to get 60%. This is a high credit utilization, and it would most likely be beneficial to you overall credit score to either spend less or consider another line of credit.
Finding your credit utilization is very simple, and can help you when budgeting. Having a 'good' credit utilization will overall help your credit score!!
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