Do you have a high balance on your credit card? Do you ever wonder how much of that bill is going to interest, and how much of it goes toward reducing the principal? If so, then this article is for you. We’ll be exploring what credit utilization is and why it’s important to know.
Credit utilization basically refers to the amount of debt used in a single month divided by the total limit on your card (also known as your “credit limit”). High balances can lead to an increased interest rate or higher rates at renewal time – not good!
Understanding Credit Utilization
If you have $100 on your credit card and for some reason only spend $50 during that time period, your credit utilization would be 50%. The lower this number is, the better! This will allow more of your monthly bill to go toward reducing principal instead of interest fees – plus it’s always nice to keep an eye on what percentage of available funds are being used each month.
Why It’s Important To Know
It’s important to know how much money goes towards paying down debt vs. going towards interest rates because high balances can lead banks or lenders to increase interest rates or higher rates at renewal time. The lower this number is, the better!
Is high credit utilization bad even if I have a high credit score?
The credit utilization ratio is a percentage of how much you owe on your cards, as compared to the amount of available credit. When looking at this number across all your accounts and debts, it determines what kind of impact any given balance has on your overall debt-to-credit limit ratio.
To put it simply: when someone with an excellent score (at 750 or higher) applies for more credit in order to take advantage of promotional interest rates, banks will use that person’s low utilization rate against him; they don’t want to increase their risk by giving out more money than necessary.
The opposite can also be true — if you have too high a balance relative to what you’re willing or able to repay each month, then even if you pay it off each month, you’ll still be considered high-risk.
When does credit utilization update?
Credit card companies typically update every 24 hours in the evening. To calculate your balance as of today’s date, you just need to subtract the credit limit from your account balance.
How does this relate to utilization? Utilization is the percentage of what you’re allowed by law and it determines how much can be applied against debt in a particular billing cycle.
What does a high credit utilization mean for my balance?
If your account is over 50% of its limit (or “maxed out”), you’re using it too much and will likely be charged more interest than someone who only uses 25%. However, this isn’t always true – it depends on a few factors.
For example, if you have $100 of available credit and charge up to $50 one day then pay the balance off before your next statement date, that would be 25% utilization. Because you’ve paid off the debt in full, your credit card company will still see that as a low percentage of utilization.
The opposite is also true – if you have $100 of available credit and charge up to $50 one day, but don’t pay it off until the next statement date (or after), then that would be 100% utilization.
This means your credit card company will likely view this as a high percentage of utilization for the billing cycle because you’ve left over half your balance unpaid until later on in the month or year. As such, they’ll give you a higher interest rate when calculating what new rates should be at renewal time.
How do I keep my balance below 50%?
Be sure to pay off the balance each month in full and on time to avoid paying interest charges. If it’s not possible to do this with one account, consider transferring balances from other cards if they have lower rates or transfer them all somewhere else for free (remember there are always penalties when closing an account).
If you’re still worried about carrying balances but don’t want sky-high interest rates, try using a 0% APR promotional offer instead where available – these could last anywhere from 24 months up to 120 months depending on length of commitment. This allows people with good credit scores who would otherwise carry high utilization ratios because they need more money than what their income affords, to pay off their debt without it costing them more when interest rates go up.
This will depend on the type of card you have – some cards offer 0% APR for only 12 months (perfect if you’re looking to finance an expensive purchase) while others may give 24 months or longer with a promotional balance transfer rate like Chase Slate® Credit Card from J.P. Morgan offers. The best thing about these types of deals is that they can help people with good credit get out from under high-interest balances and make monthly payments they can afford even after the introductory period has ended so long as they continue paying on time each month!
If your balance exceeds 50% but isn’t over 70%, then this generally won’t result in a penalty. However, it’s still in your best interest to try and keep the balance below 50% for a number of reasons including potential penalties as well as paying less interest rates on charges made during that billing cycle.
The higher you go beyond 70%, the more likely you are to incur additional fees – but there is no hard-and-fast rule here so always refer back to what your card company states when calculating these types of things.
How much will lowering credit utilization affect my credit score?
Lowering your credit utilization alone will not improve your FICO score. Credit utilization is used in conjunction with your FICO score to assess your credit worthiness. Credit scores are based on a range of factors, and lowering your balance is just one small part of that picture.
Is credit card balance and credit utilization the same thing?
No, credit card balance is not the same as utilization. Credit cards will show a balance on your statement but this doesn’t mean you’re utilizing 100% of what’s available. Utilization is the percentage of your available credit that you’re using.
Is it always bad to be at 50% credit utilization?
The 50% threshold isn’t a hard and fast rule but if you are below that then chances are good that there won’t be any negative consequences in terms of interest rates or penalties. It’s at about 65-70% where these things could happen so try not to go over that level!
