What is Credit Utilization?

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As we have discussed before, Credit/Debt Utilization makes up 30% of your credit score. Credit Utilization is the ratio of credit balances compared to the credit limits.

A new credit card means lets go shopping! Uh no!  Credit cards should be used more for emergencies not as a bonus or income.

Best practice is to learn and understand your bill cycle with each credit account and pay early and pay extra.

Credit card companies usually send their updates (your credit balance/limit and payment) to the credit bureaus at the end of your billing cycle.  So if you want your payment to lower your balance on a credit card therefore reporting a lower balance to the credit bureau it is a good idea to send in the payment at least 5 – 10 days before the close of a billing cycle.  Usually your credit card payment is due 21-25 days after the billing cycle ends. You may need to contact your credit card companies to see when their billing cycle begins and ends. Credit cards are billed on the same date each month so once you determine when your billing cycle ends it will be easy for you to make sure your payment reaches the credit card company the 5 – 10 days before the close of the billing cycle. 

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If you do this simple step above not only will you save some money in interest charges you will ensure you have lower balances reporting to the credit bureaus. This will help lower your Credit to Debt Utilization and help raise your credit score.

Remember the lower your balances are on your credit cards in comparison to the limit on each the better your Credit to Debt utilization is and will give you a boost in your credit score. 

Remember as you pay off credit cards don’t close them. If you keep the cards open and just charge a small amount occasionally and pay the balance off and it will have a positive impact on your credit score.

Finally, never just make the minimum payment. Pay the balance completely each month or make your payment more than the minimum payment required. This will not only save you money on interest rates, it will help you keep your balance lower which will also raise your scores showing you are responsible with your credit/debt utilization.

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To sum it all up, when you are extended credit don’t abuse the limit. Credit should be used to help in case of emergencies and paid off as quickly as possible. You will show you are more responsible by paying the majority of the balance when possible each month or, at least, always pay more than just the minimum payment.

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