Keep more money in your pocket and improve credit scores by keeping credit card usage to a minimum.
High utilization rates.
“Your credit utilization ratio on revolving accounts-the percentage of your available credit you're using-is an important factor in your FICO® Scores. Using a high percentage of your available credit means you're close to maxing out your credit cards, which can have a negative impact on your FICO Scores...” myfico.com
Some consumers may have seen the words "high utilization rates" on a credit denial letter. But what exactly does that mean? When it comes to understanding credit scores a “high utilization rate” can be just as damaging as a late payment.
FICO, the most widely used credit scoring model, lists amount owed as an important factor in your credit score. Roughly representing 30 percent of a credit score.
Credit utilization rate means the amount of your available credit that you are using at the time your score is calculated compared to your credit limits. It is calculated by dividing an account's outstanding balance by its credit limit.
For example, let’s say you have a credit card with a $10,000 credit limit and a $7,000 balance. Your credit utilization rate on that account is 70 percent ($7,000 balance divided by $10,000 limit equals 0.70).
Using most of your available credit labels you a risk.
According to FICO, credit utilization rate has proven to be extremely predictive of future repayment risk. So it is often an important factor in a person's score. The higher your utilization rate is, the greater is the risk that you will default on a credit account within the next two years.
If credit utilization is high, it is considered a negative factor and a reason for denial of new credit. Using a lot of your available credit or maxing out credit cards is going to hurt your credit scores.
Improve your scores by paying down balances.
The only way to recover your credit scores would be to pay down credit card balances. Closing the account will not erase the high utilization. Besides, you should never close an account because it has a high balance, you’ll end up hurting your credit score even more because now you have even less available credit.
Paying down the balances will result in an immediate improvement in credit scores. Reducing credit balances will lower your revolving utilization percentage. The ideal credit utilization percentage is 10% or less of your available credit limits.
Keep your credit card balances low. The lower your balances, the better your credit scores.