4. Credit Card Utilization
Credit card utilization is one of the most important factors credit scoring models use to calculate your credit score. You can figure out your utilization rate by dividing your total credit card balances by your total credit card limits. There is misconception that having credit card debt is a bad thing, but someone with no credit cards tends to be a higher risk than someone who has managed credit cards responsibly. Also, creditors want to see proof that you can manage your credit wisely–something you can’t do without using the credit you’re granted. So, have credit cards – but Manage them responsibly. In general, having credit cards and paying timely payments will build or rebuild your credit scores.
When you have your credit cards, keep the balance low. Lenders don’t like high utilization rates because it tends to indicate there’s a higher chance of you not being able to repay your debts. Keeping your credit card utilization low, preferably under 30% is a good goal to aim for. Some data suggests an even better goal is to keep it under 20%. For example, I have 7 credit cards. The total credit limit of all the cards added together is $31,350. My credit card debt is $2,126, which is only 7% utilization of the limit. That is deemed as excellent.
If you’re uncomfortable with the idea of using your card for large purchases, you can still show an active credit profile by paying for small items with your card. It’s important that you practice good habits when managing your credit cards. Charge what you can pay back and make sure your payments are on time. In order to keep your utilization rate greater than 0%, you’ll need to let your charges show up on your billing statement, and then you can pay it off in full. This does not mean you need to carry a balance from one month to the next–doing so may just cost you money in the form of interest.