The Importance Of Your Credit Utilization Rate

credit-utilization-rate

Unless you’re born rich a good credit score is essential for a good quality of life. Your score can be used to determine whether a landlord will rent to you, whether an employer will hire you, what rate you get on a car loan and whether you qualify for a mortgage to buy a house.

And the better your score the lower your interest rate will be. Just a small difference in the interest rate could save you thousands of dollars in the long run.

Now you already know that in order to raise your credit score you’ll need to make your payments on time – every time. But there’s another less known method to help you raise your score. It’s called credit utilization rate. If you learn to master it your wallet will thank you later.

Here’s how you can master your credit utilization rate.

Don’t Close Your Accounts

Closing down credit cards is something that most people do because they erroneously believe that it will help their credit score. After all, if you have 8 credit cards then you figure you’re not a good candidate to get a loan. However, you’d be mistaken. Someone with 8 credit cards in good standing is actually exactly what loan companies are looking for.

Terminating some of your credit cards will almost certainly hurt a credit score. One of the factors that goes into calculating credit scores is something called credit utilization rate. This process involves comparing an individual’s total balance owed to their total credit limit.

By closing down accounts people lower their credit limit without lowering their balances. This hurts their overall credit score.

Consider This Scenario

You have 2 credit cards. One has a $1,000 credit limit and you carry an $600 balance. Then you have another card with a $1,000 limit which you do not use. Together,  you owe $600 and have a combined credit limit of $2,000 which is a 30% utilization rate. But if you cancel the card you don’t use, your new credit utilization would now be a horrible 60% rate.

Having a high “CUR” shows that you are using a lot of your available credit. Thus, if you ask for a loan, it shows you are desperately in need of money. Loan companies are a bit strange. They only want to loan money to people who don’t need it and don’t like granting loans to those in need.

The Ideal Credit Utilization Rate

Now after all this you may be wondering what the ideal CUR is. Experts say to keep it below 30 percent. So you would figure that 0% would be the best utilization rate but you would be mistaken. Zero percent means you don’t even use your credit cards. This is bad news for loan companies looking for a steady history of you paying interest.

Generally speaking though, the lower your rate the better. So aim to keep it at 15%. So if you have 4 credit cards, each with a credit limit of $2,500 you’ll have a credit limit of $10,000. In this scenario keeping a total balance of $1,500 would be ideal.

About The Author

Edwin is a marketer, social media influencer and head writer here at Daily Finance Options. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.

 

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