How Much Will Lowering My Credit Utilization Raise My Score? | LEVEL Financing

1
How Much Will

• Lowering My Credit Utilization Raise My Score?

BY LEVEL FINANCING
2
IMAGE
3
One important factor to consider if you are
trying to improve your credit score is credit
utilization. This term refers to the share of
your overall available credit that is currently
being borrowed. Its importance is due to its
effect on your credit score. As a result, your
credit utilization can impact your loan
applications success and the interest you pay
if the loan is approved. Many borrowers and loan
applicants ask themselves how much will
lowering my credit utilization raise my score?
This article will help you answer this question
in delt and outline the best strategies to
reduce your credit utilization.
4
The formula you need to calculate credit
utilization is quite simple. Here it is
A real-life example can help you grasp this
concept better. Lets imagine you have two
different credit cards Credit Card A, with a
credit line of 8,000 and an outstanding balance
of 2,200 Credit Card B, with a credit line of
5,000 and an outstanding balance of 900 So,
the sum of your available credit is 8,000, and
your current outstanding debt is 2,900.
5
Many factors play a role in determining your
credit score. According to CNBC, credit
utilization is the second most important element
used by credit agencies like FICO in determining
a borrowers score, the first being your payment
history. All other factors being equal, the
lower your credit utilization rate, the higher
your credit score. In turn, this increases the
chances of your loan application being approved
and your borrowing cost being low. Your credit
score is particularly important if you want to
apply for unsecured loans, as they dont require
collateral.
6
Your outstanding balance changes as you use your
available credit line to buy products or pay your
bills and as you pay off your debt. Your lenders
will regularly report this balance to credit
bureaus like Experian, Equifax, or
TransUnion, which then use the FICO formula to
determine your credit score. Balance transfers
wont affect your credit utilization (and thus
your credit score) as the formula looks at your
overall outstanding debt across all credit
cards. The exception is when you use your
balance transfer credit card to pay back your
debt faster (or lower the current interest you
pay). We will explore this method later.
7
Your credit utilization can also increase due to
a decrease in your overall credit line. This
could be the case of closing a credit card or
your provider lowering the maximum amount you
can borrow each month. It also means you can
increase your credit utilization by applying for
AND obtaining additional credit cards. However,
this may negatively affect your FICO score
through other factors (e.g., increased credit
inquiries and new debt).
8
In general terms, the closer your credit
utilization is to zero, the more your FICO score
will benefit as a consequence. Of course,
theres little point in having a credit card if
you barely use it. One golden rule you often
hear around is to keep your credit utilization
below the 30 threshold. Yet some experts
suggest that it may not be enough if you want to
significantly improve your credit score and get
access to the best loans. A 2019 article
published on CNBC suggests that any credit
utilization above 5 may have an adverse impact
on your credit score.
9
However, a report from FICO itself provides the
most interesting insight. The study looks at the
so-called high achievers, borrowers whose score
is above 750 and who are more likely to snatch
the best loan offers. Here are the findings of
this investigation. Overall, high achievers keep
their credit utilization rate below 10 on
average. The youngest high achievers keep their
credit utilization rate below 12 on
average. Maintaining your credit utilization
below these percentages is probably the best
goal you can set if you want to see your credit
score improve significantly.
10
It must be clear that the effectiveness of
lowering your credit utilization on your credit
score also depends on how well you perform under
the other criteria. If you have recently missed
debt payments, lowering your credit utilization
will have a lighter impact on your score than if
your payment record is pristine. In general,
you should always try to keep your credit
utilization low avoid missing payment
deadlines avoid applying for new loans or credit
cards too often increase your credit historys
length
11
Thank You
https//levelfinancing.com/lowrering-my-credit-
utilization-raise-my-score/