Credit utilization is a key metric for lenders to assess the risk of lending money. Lenders will look at your credit card balance and compare it against what you can afford to spend on that same credit card. This measure, called the "credit utilization ratio," tells them how much of their available credit you're using. The lower this percentage, the better off you are in terms of managing debt levels. In order to succeed with managing your credit utilization rate, try implementing these tips into your daily routine:
1) Always pay off balances monthly: If you have a credit card and are carrying balances, then it's time to take action. Credit utilization is the percentage of your total available credit that you're using at any given time. The lower your number, the better off you will be in the long run because it means you're not maxing out your cards and incurring higher interest rates. You can easily keep this low by paying off all balances monthly so that they never get too high!
2) Avoid making new purchases: Credit utilization is a big factor in your credit score. The higher your debt-to-credit ratio, the less attractive you are to lenders. Charge up your existing cards and avoid making new purchases instead!
Start with this: "Lenders use credit score as a measure of how risky it would be for them to lend money."
3) Make payments early in order to take advantage of low interest rates: Interest rates are at historic lows. If you have credit card debt, make payments early to take full advantage of these low rates. Credit utilization is one factor that will affect your credit score and can cause a drop in your score if it becomes too high. Make sure to pay off any balances so you can avoid paying higher interest rates later on when the new year starts!
4) Pay attention while shopping online: You're not alone if you've found yourself in the middle of an online shopping spree and realized that your credit card is maxed out. You might have been juggling payments for a while now, or maybe this was just one too many impulse buys. Either way, you need to stop spending money until your credit utilization ratio goes down.
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