Credit utilization refers to the percentage of your available credit that you are currently using. It is a key factor in determining your personal credit score. Credit scoring models consider both your overall credit utilization across all your credit accounts and the utilization on individual accounts.To calculate your credit utilization, you divide your total credit card balances by your total credit card limits and multiply the result by 100 to get a percentage. For example, if you have total credit card balances of $2,000 and a total credit limit of $10,000, your credit utilization would be 20% (2,000/10,000 x 100).
Credit utilization is important because it is seen as an indicator of how responsibly you manage your credit. A lower credit utilization ratio is generally considered better for your credit score. If your credit utilization is high, it can suggest that you may be relying too heavily on credit, which could indicate a higher risk of defaulting on payments.
Lenders and credit scoring models typically prefer to see a credit utilization ratio below 30%. Keeping your utilization below this threshold can have a positive impact on your credit score. It's generally recommended to aim for a credit utilization ratio below 10% to maximize your credit score.
It's worth noting that credit utilization has no memory, meaning it can change from month to month based on your credit card balances. So, if you have a high utilization one month but then pay off your balances, your credit utilization will decrease and could positively affect your credit score.
In summary, maintaining a low credit utilization by using credit responsibly and keeping your balances relatively low compared to your credit limits can help improve your credit score.
Credit reporting agencies determine credit scores based on a variety of factors and events in an individual's credit history. While the exact formulas used by credit reporting agencies to calculate credit scores are proprietary and may vary, they generally consider the following key factors:
1. Payment History: This is the most significant factor in determining a credit score. It includes the record of whether payments were made on time or if there were any late payments, defaults, or bankruptcies.
2. Credit Utilization Ratio: This refers to the amount of credit being used compared to the total available credit. Maintaining a low credit utilization ratio, typically below 30%, is considered favorable.
3. Length of Credit History: The length of time accounts have been open and the age of the oldest account are important. A longer credit history can be beneficial for establishing creditworthiness.
4. Credit Mix: The types of credit accounts you have, such as credit cards, mortgages, car loans, or student loans, contribute to your credit score. Having a diverse mix of credit can positively impact your score.
5. New Credit Applications: When you apply for new credit, it generates a hard inquiry on your credit report. Multiple recent inquiries can have a negative impact on your credit score.
6. Public Records: This includes information about any bankruptcies, liens, or judgments that may be present in your credit history. Such public records can significantly affect your credit score.
It's important to note that credit reporting agencies like Equifax, Experian, and TransUnion have their own scoring models, such as the FICO Score and VantageScore. While the general factors mentioned above are considered, the specific weightings and algorithms used by each credit reporting agency may vary.