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  • Writer's pictureDave Fullerton

Credit Utilization and Your Credit Score

You're not alone if you've ever wondered how credit card use affects your credit scores. Many people don't realize there's a direct connection between the two.


Here's what you need to know about credit card utilization and your credit scores.


What is credit utilization, and why is it important?

Credit utilization is a critical factor in determining your credit score, and it's referred to as a ratio and is used widely across the financial industry. To calculate this amount, divide the balance by the credit limit across all credit accounts like credit cards and lines of credit that are active and reported on credit reports. For example, if you have an available credit limit of $1000 and you owe $500, your credit utilization rate would be 50%.


You might often hear financial advisors and mortgage brokers tell you to keep it between 30-37% to be favourable. But why is this? It lowers your credit score, ultimately leading to better loan rates.


How can you keep track of your credit utilization rate, so it stays within a healthy range?

It's important to keep track of your credit utilization rate, which is the proportion of what you owe on your credit cards divided by their total limits. To ensure it stays within a healthy range (generally under 30% to be considered a good credit score), start by obtaining copies of your credit reports from each of the three major bureaus. With those in hand, you can quickly see how much you owe by each account. Try to track this number monthly - set a reminder on your phone or calendar every month, so you don't forget to check. This way, you'll always know where you stand and can adjust accordingly if your utilization rate begins to creep up too high.


Quick tip for maintaining a healthy rate: reduce spending, make payments quickly, increase your available credit limit, and cancel unused credit cards are all viable methods for keeping your utilization rate low and maintaining good credit.


How does my credit card utilization impact my credit scores?

Your credit card utilization—the percentage of how much you've charged versus your total credit limit— is a big factor in determining your credit score. Missing or late payments and being maxed out will make your score tumble. But keeping utilization low shows lenders that you can manage debt responsibly, which strongly improves your score. You want to aim for less than 30% usage, so lenders don't think you're using up all the available credit on your cards. Managing utilization well can help give you a more favourable interest rate when applying for new lines of credit.


Confused about what else improves your score? Read our blog post, where we answer commonly asked questions about what makes a good credit score.



Bottom Line

Credit utilization is a critical factor in determining your credit scores. You can calculate your credit utilization rate by dividing your total outstanding balance by your available credit limit. Keeping track of your credit utilization rate is essential to ensure it stays within a healthy range. Your credit card utilization will impact your credit scores positively or negatively depending on how high or low. If you're struggling to keep your credit utilization under control, there are steps you can take to improve the situation.


Contact us today if you have questions about how your credit utilization affects your ability to get approved for a mortgage. We would be happy to help you understand what steps you need to take to get the best loan terms and interest rates.



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