Understanding Credit Utilization and Its Impact on Your Credit Score

Mar 20, 2023

Credit cards can be helpful tools in establishing a credit record and a credit score. But you must be mindful of how you use them, as being careless could mean getting deep into consumer debt and having to seek help from credit repair companies in Dallas, TX. By keeping your credit utilization at optimal levels, you can improve your rating.

What does credit utilization mean?

The ratio of your credit card limit to your outstanding balance is your credit utilization. It is calculated by dividing your outstanding balance by your credit limit, then multiplying the result by 100.

For instance, if the credit limit is $1,000 and your balance is $30, then your utilization is 30 percent. Add $500 of new charges per month on the card with the same credit limit, and your utilization rate becomes 50 percent.

A lower percentage is better, and it shows you are using only a minimal amount of your credit. In contrast, high credit utilization may result in lower credit scores and make it more challenging to keep up with monthly payments, putting you at risk of getting higher interest rates. Most credit card owners with this problem turn to credit repair companies in Dallas, TX, to help improve their scores.

Know what affects your credit score.

Various things influence your credit score depending on the credit scoring model. For FICO, it’s your payment history, age of the credit, new credit, the mix of credit, and level of credit utilization or debt.

The FICO scoring model assesses your credit utilization in two steps. First, it evaluates the credit utilization for each of your credit cards separately. Afterward, it determines your overall credit utilization by comparing the sum of all your credit card balances to your total credit limits.

Licensed and bonded credit repair companies in Dallas, TX, can educate you further on credit utilization as part of their assistance to improve your score. They can also offer access to a licensed attorney for timely legal credit solutions.