Recent times of economic crisis has seen a lot of people struggling with their finances and falling in the debt trap. This is because almost all of them have exposed themselves to several loans which are beyond their capacity to hold looking at their income. The situation led people to live their life from paycheck to paycheck. Any disruption in their salaries saw them striving to meet their expenses. Most of them were found to struggle with their debts and the repayment of the same became a huge burden for them. Such circumstances forced people into gaining knowledge about how their life really gets affected by the loans they take and what are the factors that affect their finances.
One of the most important factors which affects your credit worthiness is the credit score. So, over the years people have understood the way it affects one prospect for the better living and hence they try and understand each and every factor which impacts the credit score. One of the most important ones is the credit card debt and activity. A lot depends on the way you use your credit cards and to the extent you utilize the credit limit allotted to you. If you are the one who keeps track of all the expenses you make with the credit cards and keep the utilization below 40% of the allotted credit limit, you are the one who is going to be happy as your credit score will remain at a higher notch.
What’s Credit Card Utilization?
Credit cards are meant to be used at the time of emergencies only. At any point of time the amount of credit used by you against the credit limit offered to you when expressed as a ratio shows the credit utilization. Whenever you apply for the loans or the lines of credit for any purpose be it the high value loan like the auto loans, mortgages or even the smaller loans like the personal loans for people with bad credit, creditors do check your credit utilization to ensure that they are making the correct lending decision.
If your credit utilization is high this depicts that either you have been faced with a lot of emergency situations or you are not financially disciplined. Lenders see this as a risky proposition. Over dependence or use of credit cards shows that the individual is not maintaining a balance between their income and the expenses and hence they have to use their credit cards every now and then.
Is There a Perfect Credit Utilization Score?
Although there are no fixed standards for the credit card utilization ratio, anything which is lower is respected and appreciated by the lenders. A low credit utilization ratio shows that the individuals are better managed in terms of the finances and hence approving loans to them is never going to be a worry.
Varying Utilization Rates
The utilization rates that you can receive from your credit card at any point of time will vary depending on when are they calculated and how often the credit reporting agencies are reporting the same to the bureaus.
Answers about Credit Card Utilization and Your Credit Score
If you have used your credit card to the fullest and still have the balances carried out through the month you are likely to have a higher utilization ratio as the as the unpaid amount will show up as the credit utilized. This will definitely mean a lower credit score for you. However, when you are looking for a loan, creditors do not make their lending decisions just after looking at your credit utilization ratio and the credit score but that take stock of the other major factors like your income, debts that you are required to pay and how regular you have been in your payments.
Your Credit Score: There’s More to Consider
Your credit score is definitely affected by your credit card management and the utilization ratio and it is therefore required that you refrain from high usage of the cards. Anything which is above 40% of the credit limit offered on your card is moving into the danger zone and therefore you should pull off from it. Another important aspect related to the credit card utilization is that whatever the amount due on the credit cards it should be clear in that month itself in fact at the earliest, need be by channelizing all your resources towards the payment of the same.