Credit Utilization
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Welcome to "Financially Savvy," the go-to podcast for unlocking the mysteries of personal finance. Today, we're diving deep into a critical topic that affects everyone with a credit card: Credit Utilization. Credit utilization might sound complex, but it's actually a straightforward concept. It refers to the amount of credit you're using compared to your total credit limit. For instance, if you have a credit card with a $10,000 limit and you've used $2,000 of it, your credit utilization rate is 20%. This little number is a big deal because it makes up about 30% of your FICO score. The FICO score, a common type of credit score used by lenders, looks at various aspects of your financial behavior. The largest factor, at 35%, is your payment history - whether you pay your bills on time. But right after that, at 30%, is the amount you owe, which includes your credit utilization. Now, you might be thinking, "Why does this percentage matter so much?" It's a key indicator of how you manage debt. Lenders want to see that you can handle credit responsibly, not max out every card you have. In fact, a high credit utilization can drop your score almost as much as missing a payment! Here's another interesting point: credit utilization is about the percentage, not the dollar amount. It's not about how much you spend, but how much of your available credit you're using. If you have a $1,000 balance on a $1,000 limit card, that's a 100% utilization rate - a red flag for lenders. But the same $1,000 on a $10,000 limit card? Only 10% utilization, which is much more favorable. Credit scores look at utilization in brackets. The lower your utilization, the better. Ideally, you want to stay below 30%, but under 10% is excellent. But don't fall into the trap of thinking that 0% utilization is perfect. If you never use your credit cards, it can signal to credit bureaus that you're not actively managing credit, which can ironically hurt your score. The sweet spot is using a small portion of your credit and paying it off regularly. Remember, credit utilization only applies to revolving credit like credit cards, not to installment loans like mortgages or auto loans. Each card has its own utilization rate, and high utilization on even one card can negatively impact your credit score. Conversely, reducing your balances can quickly improve your score, as credit utilization has a short-term effect. A unique case is business credit cards. Most business credit cards don't affect your personal credit score if you make timely payments. This means that high utilization on these cards might not impact your personal credit. One final tip: pay your balance before the statement closing date. Credit card issuers usually report the balance to credit bureaus at this time. Paying early can help you show a lower utilization rate. That wraps up our deep dive into credit utilization. Stay tuned for more insights on managing your finances effectively. Thanks for listening to "Financially Savvy."
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