Credit utilization refers to the amount of your credit limit that you’re using. For example, say your credit card limit is $10,000 and you’re using $2,000 — that means your credit utilization sits at 20 % for that particular line of credit. The higher your credit utilization percentage is – and this calculated across all lines of credit – the lower your credit score will be.
Paying your bills each month and paying off debts are the most direct ways to lower your credit utilization.
Another good way to decrease your credit utilization is to increase the limit on your credit card – this means that the percentage of your credit limit being used decreases because you’ve increased it (as long as you don’t simultaneously increase your balance!).
A good credit utilization percentage for lowering your credit score is 10 % or lower, so try to aim for that. In general, a good percentage for maintaining your credit score is less than 30 %.
Paying off debt has a direct effect on your credit utilization percentage, so that means it will lower your credit score.
The magnitude of this effect has to do with how high your credit utilization already is – if the card’s maxed out and you pay off the debt, your credit score will increase more dramatically than someone who has a low-to-medium credit utilization score.
The amount of time it takes for you to pay the debt back also has an effect – if you pay it all back overnight you can expect your credit score to rise rapidly whereas, if you pay it back over a few months or years, it’ll increase gradually. Do whatever you can sustainably manage: what matters is that you are taking steps to pay off the debt and are headed in the right direction.
Try applying the debt-snowball method to pay off your debts – this is where you make a list of your debts, tackle the smallest amount, and, once that’s paid off, move onto the next. You work your way up to the largest amount, however long it takes you. Like anything else, crossing things off a list helps keep you motivated and wanting to make it to the end.
Sometimes, you need a bit of help remaining accountable and expediting the process of paying off debt – if so, consider finding a reliable debt management plan.
By Admin –
