Credit Card Guide

What is a Credit Utilization?

11 August 2010 by CreditCardsCo™

Even though the term credit utilization may seem like a pretty general term in terms of how to utilize your credit issued on your card, this in actual fact is not the case. Credit utilization has a lot to do with your over all credit rating which is based on a number of factors that many people tend to over look. When it comes to financial terms, this is a perfect example of the expert knowledge that is required in order to be able to understand what is good and what is bad. In layman terminology, having a high credit utilization rate would technically mean a good thing when in actual fact this is not the case. The lower your credit utilization score is the better effect it has on your credit rating. We will take a look at this in more detail below.

An individual's credit score is based on five different factors which include:

  • payment history,
  • amounts owed,
  • length of credit history,
  • types of credit used,
  • new credit issued.

Each section is known to hold a certain percentage in terms of the weight amount in carries towards your final credit rating score. The section of credit utilization is known to fall under the amounts owed category. In terms of how much it weighs to your final credit rating, the amounts owed category is known to weigh 30% of which 20% is based on credit utilization.

For those that are having difficulty in understanding the importance of credit utilization in layman terminology, what it basically means is that the quicker and faster you can pay off your debt the better. Even though credit cards come with a monthly limit that is not required to be paid off fully every month, it is important that one attempts to pay off as much debt as they can. Not paying off the complete borrowed amount will mean that you will end have having to pay more money on interest repayments?

The key to maintaining a good credit rating score is all to do with maintaining a balance amongst all the five categories mentioned above. At times, it can prove quite difficult to try and calculate things on your own especially when you have many other things on your hand. With financial terms and regulations constantly changing especially in regards to credit cards, it would be a good idea to get some form of professional advice.

The problem with credit utilization is that there are quite a number of variables to consider. Taking one wrong step or miscalculating a figure can have a drastic effect on your overall credit card rating. For this very reason, the best and highly recommended option would be to hire a professional financial advisor or someone that is an expert in the credit field. There are a number of resources available online as well that one can make effective use off. If you do decide to look for information online, make sure that you only go for reliable sources.

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