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How Do Utilization Rates Affect My Credit Score?

“Credit utilization ratio” (also known as “debt utilization ratio” or “debt-to-credit ratio”) might sound complicated, but it’s not. It’s simple — and lowering it is a simple way that can help impact your credit score.

The Biggest Factor No One Understands

Most people haven’t heard of credit utilization rates, but they typically make up about a third of your credit score.1 In fact, after payment history, utilization is the biggest factor.

Utilization is simply how much of your available credit you’re using. That includes the percentage of each card you’re using, as well as the percentage of your total available credit. A sampling of credit scores found that, generally speaking and assuming all else being equal, those with lower utilization had a higher credit score.2

Why Do Creditors Care About Your Utilization Ratio?

Using more credit makes you less likely to pay back what you’ve borrowed. A high utilization rate fits the profile of someone who might be “living on credit.” That’s a fiscally dangerous way to live, and a high risk for potential lenders.

A credit score is a prediction of how likely you are to pay your credit obligations as agreed. Potential lenders want to know that you pay your bills on time and don’t rack up debt to live above your means.

How to Improve Your Utilization

The good news: Lowering your utilization can help your credit score.2 The simplest way to lower your utilization is to pay down your debts. Often, people will ask for credit limit increases on existing cards which may have the effect of lowering their utilization ratio, however this can negatively affect their score as higher credit limits are often seen as more risky in general. You should only ask for credit limit increases when there is a real need and if you are able to pay down your balances in a timely manner. Otherwise you could be at greater risk of getting too far in debt overall, which can harm your score. So paying down existing credit cards and keeping balances low is general acknowledged as the best course of action.

The bottom line is, a lower utilization rate bodes well for your credit score as long as you consistently pay all your bills on time every month, and the higher your credit score, the better. Most experts recommend keeping your utilization as low as possible.

Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

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