Don’t put your credit score at risk by not understanding how you end up with a high credit utilization rate.
- The credit utilization ratio refers to the credit used versus the credit available.
- If you want a good credit score, you must maintain a low utilization ratio.
- You can assume your ratio will be low if you pay off your balance, but it depends on when you pay.
Your credit score has a huge impact on your finances. Determine if you can borrow, which lenders will give you loans, how much you will pay for the loan, and whether people, such as landlords, will want to do business with you. Since your credit score is so important, you need to know the factors that affect it and make smart decisions to get the best possible score.
While your history of paying bills on time is the most important criteria used to determine your score, your credit utilization ratio is a close second. Your credit utilization ratio is the amount of your available credit that you have used at any given time. So, for example, it would be 20% if you had a total of $10,000 in available credit but had loaded only $2,000 on your cards.
The credit utilization ratio is determined based on what your creditors report to the credit bureaus each month. If you pay your card in full, then you can assume yours would be 0%. But that’s not necessarily the case, and in fact, your utilization may be much higher than you think. This is why.
Here’s why your credit utilization ratio can be surprisingly high
Paying off your credit card in full, or drastically reducing your credit card balance, doesn’t necessarily guarantee that you’ll have a low credit utilization ratio for one simple reason.
Creditors report the amount of credit you have used at a specific time during the month. And if that time occurs before you’ve made your credit card payment, then the balance your issuer reports may be higher than you expected.
Let’s say, for example, that you load $9,000 over the course of each month on your credit card with a credit limit of $10,000. You pay your balance in full when it’s due on the 20th of the month, but the credit card company reports your balance on the 15th of the month. As a result, her credit report would show a balance of $9,000, even though she ultimately paid off the card just a few days later.
Here’s why this could be a problem
Unfortunately, if your credit card company reports your balance before you pay it off, your credit utilization ratio may appear too high when your credit score is calculated. And lenders may see a high credit balance by looking at your credit report.
This could affect your ability to borrow and could prevent you from getting the best rates. A lower credit utilization ratio will help you get a high credit score, while using more than 30% of your available credit could lower your score.
The best way to make sure this doesn’t happen is to find out when your credit card company reports your balance and pay your bill before that happens. Sometimes credit card companies will tell you this directly if you ask. Or you can check the reported balance and deduct the date from that.
It’s worth paying attention to the amount reported on your credit report to make sure you’re not inadvertently hurting your credit score based on the day you paid your credit card bill.
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