5 Benefits of Having a Low Credit Utilization
Credit Utilization is one of the 5 main aspects that impact your credit rating. In fact, it accounts for 30% of the overall score!
Other factors include your payment history (whether you have been paying on time), the age of credit (how long you have been borrowing for), credit mix (the types of credit you hold), and credit inquiries (if you have been applying for new credit).
But what is credit utilization, why does it have such a big impact, and why is it a good idea to keep it low?
Let’s take a closer look:
What is Credit Utilization?
It can be best described as your level of debt in relation to your credit limits. In other words, how much of your permitted balances are you actually utilizing?
So, if you have a credit card with a limit of $2,000 and your current balance is $200, you have a credit utilization of 10% on that card. Your overall credit utilization takes in to account all of your cards and debts.
To find out what your credit utilization is, add up all of your balances and divide that number by the total of all of your credit limits, then multiply the answer by 100. This will give you your credit utilization as a percentage.
Note: Your credit utilization and the other factors used to calculate your credit score is based on the information in your credit report. This report is not always up to date to the day and is based on billing cycles.
The lower you can get your credit utilization while still regularly using the account, the better. Here are 5 reasons why:
- You Aren’t In Unmanageable Levels of Debt
Unless you’re committing fraud and lying on credit applications, the credit check process works quite well and you will rarely have access to so much credit that you cannot really manage it.
So if you have low balances (low credit utilization) on your credit accounts, this is a sign that you are in a good place and aren’t at an unmanageable level of debt, and can increase the balances with new purchases if you see fit.
In turn, this also suggests that your credit score is probably good, unless you made mistakes in the past, such as missing payments.
- You Won’t Need To Borrow More
If you have low credit utilization this means you have lots of room on your card(s) to make more purchases, should you choose to. What this also means is you don’t have to borrow more to cover your obligations or purchasing desires, as your existing accounts can cover it.
Taking out a loan or opening a new credit account can (at least temporarily) impact your credit score.
Having low credit utilization also means you are safe in an emergency financial situation.
- But You Can If You Want To
That being said, the other good element of having low credit utilization is that you’ll tend to have a good credit score and thus the ability to borrow more should you want to. This is because lenders will be able to see that you are good at keeping within your limits and don’t pose them a lot of risks.
But why would you want to borrow more if you are not at your limits?
Credit cards and existing credit accounts are not always the most efficient way to borrow. For example, a new card might have a 0% or low interest offer rate, rewards for spending, or some other kind of perk.
Furthermore, existing credit cards might not be the most practical form of credit for certain purchases or uses – for example taking out a new loan for car financing, starting a business etc.
You also tend to be able to borrow more with a loan, which your existing cards might not be able to cover even if you have low credit utilization.
If you’re in a situation where you want to borrow more but only want to have one credit card, while keeping credit utilization low, you might consider taking out a small short-term loan from the likes of ElcLoans, which you will pay back within 30 days. This way any changes to your credit utilization will be temporary.
- Higher Rewards
Many credit cards offer rewards in the form of cash back, gift cards or other perks. If you have maxed out your cards you obviously won’t be enjoying these perks because you can’t keep spending.
Whereas if you’re nowhere near the limit and are managing your cards from month to month, you can keep spending and keep racking up points or however else your rewards are measured.
- You’re Still Making Lenders Money
This might seem cynical and not necessarily a personal benefit, but having low credit utilization is better than having a zero balance because you are still making lenders money via the interest.
The perfect borrow is one that is always in a bit of debt but never struggling.
What this means for you is that you are continuing to make payments and continuing to build a positive credit history, which in turn is positively reflected on your credit report. This is sometimes referred to as credit age.
While credit utilization is only one of several factors that determine your credit score, if you aim to keep it low, most other factors also fall into place.
It’s a sign that you are managing your debt well, are therefore a trustworthy borrower and can borrow more, and you’re in a good position if you find yourself in a financial emergency.