Your credit scores can wax and wane a bit like the moon, changing frequently as your credit accounts and balances change. However, big changes to your credit scores could be an indication that something is amiss.
Key takeaways:
That's why it's important to check your credit reports and scores on a regular basis, Freedom Debt Relief explains. You can get free copies of your credit reports from all three major credit bureaus — Experian, Equifax, and TransUnion — through AnnualCreditReport.com (this is the only site authorized by the government to provide the free credit reports that you’re entitled to by law). So there's no reason not to check your credit at least a few times a year.
The transition from June into July marks the halfway point of the year, which is a great time to stop for a mid-year credit check-up. A lot can happen in six months, so pull all three credit reports to make sure everything looks as it should.
If you notice accounts on your credit report that you don't recognize, dispute them. You can dispute any fraudulent accounts or other errors right away, usually while you’re viewing your credit reports online. You have to dispute errors with each credit bureau, even if you see the same error on all three credit reports.
It's also a good idea to check your credit scores in a few places. You can get free credit scores from a variety of sources, including:
If your credit scores aren't looking as perky as you'd like, look to your reports to find out why. If you notice a lot of high balances, then high credit utilization is likely the culprit.
Your credit utilization ratio or rate is a measure of how much of your available credit you're using. It's calculated by dividing your credit card balance by the credit limit.
For example, if you have a credit card with a $5,000 credit limit and a $2,500 balance, your credit utilization is 50%.
If you pay down the balance to $1,000, then the utilization will also drop:
$1,000 / $5,000 = 0.2 or 20%
Your utilization is calculated for each of your credit cards individually, as well as overall across all of your accounts.
There’s no magic number to shoot for, but once your utilization hits about 30%, you could start to notice a negative effect on your credit scores. By the same token, if your utilization is in that 75-90% range and you start bringing it down, your credit score could improve noticeably.
Exactly what happens to your credit score will depend on many factors.
Consistently low credit utilization rates are a great sign that you're managing your credit cards well. It means you're paying in full (or mostly in full) every month and not overspending on your cards.
High credit utilization — especially over time — can be an important red flag that you have unaffordable debt and you might be struggling to get ahead.
Here are some of the reasons you might be carrying high credit card debt:
Even if you're not alarmed by high utilization, creditors will be. Statistically, people with high utilization are more likely to miss payments or even default on their debt. That makes them riskier borrowers, no matter what the reason for the high utilization. That's why a high utilization rate can cause your credit score to drop.
Your high credit utilization isn’t telling you that you’re a bad person or that you can’t manage your money. It’s only telling you that you need a plan to address your debt.
High credit card utilization is a common problem shared by many people in need of debt relief. Internal data for debt relief seekers carrying a credit card balance from Freedom Debt Relief says a lot about how different age groups are using — and relying on — credit right now.
Take a look at the infographic below:
What it shows:
Across all age groups, the average utilization was 74% — well above the 30% guideline typically used to gauge financial health.
If your number’s that high, you’re not alone — but it may be time for a reset.
Credit utilization is calculated based on your balances and your credit limits, so there are two ways to improve your utilization rate:
Your credit utilization rate is arguably the most fluid credit score factor since it changes every time your balance changes. Improving your utilization rate is one of the simplest and fastest ways to improve your credit scores.
Most credit card issuers report balances and limits to the credit bureaus once a month, often at the end of the billing period. Any changes you make could impact your credit scores the next time the creditor updates your account details with the bureaus.
How often is credit utilization reported?
Credit card companies typically report every month, based on your card's billing cycle. However, not every creditor reports to all three credit bureaus or even every month. So, if you make a big payment, your credit utilization might not drop immediately. If you're looking forward to your utilization going down, ask your creditor when they will report your balance.
Can I lower my credit utilization without paying off debt?
Yes. Even if your balance owed remains the same, you can lower your credit utilization ratio by increasing your available credit. You can do this by getting a credit limit increase on your existing credit cards or by opening a new credit card account.
Does closing a credit card affect credit utilization?
Yes. If you close a credit card, you lose the credit limit on that card. That raises your overall credit utilization ratio. Here's an example: Let's say you have a $500 balance on a credit card with a $1,000 credit limit. Right now your utilization is 50%. If you close that card, your credit limit effectively becomes $0. But you still have the $500 balance. You've more than maxed out the limit. Until your balance is paid off completely, this will look like a maxed-out account. The $500 balance will also factor into your overall utilization.
This story was produced by Freedom Debt Relief and reviewed and distributed by Stacker.
