Credit Utilization Essentials

What is Credit Utilization?

Credit Utilization is the amount of credit line you use out of your available total. For example, if you can borrow a total of $10,000 and spend $5,000, your utilization rate will be 50%.

This percentage is based on the total number of revolving lines of credit you have. What are revolving lines of credit? They’re accounts where you can borrow up to a maximum limit and pay back over time, like credit cards, personal lines of credit, and home equity lines of credit.

How Does Credit Utilization Impact Your Credit Score?

Credit Utilization makes up about 30% of your credit score, making it one of the most important scoring factors. High utilization rates can hurt your credit, so the lower your utilization rate, the better. Generally, it is best to use less than 30% of your total credit limit, but lower is better. So if you can get your utilization rate to 15% or under 10%, you’re doing amazing. 

Credit Utilization Myths: Clarifying Common Misconceptions 

Credit Utilization Myths

Myth 1: Carrying a Balance on Your Credit Cards Will Help You Build Credit Faster. 

One of the best ways to build credit quickly is to pay your balances off in full. Paying on time and keeping a low utilization rate are the two more important factors for building credit, so keeping your balance as low as possible is ideal.

Myth 2: It’s Best to Pay Off Credit Card Debt on the Due Date.

On-time payments are the most important part of building credit, and paying off your credit card debt early can help speed up the process. If you pay off your debt in full early, you increase the chances that you will have a lower utilization rate when your statement comes. 

Myth 3: Installment Loans and Charged-Off Accounts Count Towards Your Overall Utilization

Only revolving lines of credit are included in your total utilization rate, so installment loans or charge-off accounts do not count toward your utilization. 

Myth 4: If Your Credit Utilization is Below 30%, it’s Not Hurting Your Credit

If your utilization is always right at 30%, you’re at the upper recommended limit for building credit, which may negatively impact your score. The lower your utilization, the greater the chances it will have a positive impact on your credit.

Credit Utilization Hacks: Strategies That Can Help You Build Credit Faster 

Credit Utilization Hacks
  1. Pay Off Credit Card Debt Before Your Due Date
    1. This can lower the utilization reported to the bureaus.
  1. Pay Off Your Highest Utilization Card First
    1.  Although your overall utilization is typically most important, individual credit cards with high utilization may impact your credit score if they’re too high.
  1. Set All of Your Credit Card Payments to Autopay
    1. Consistent on-time payments make up 35% of your total credit, and missing a payment can have a big impact on your score. Setting up autopay can be a good failsafe in case you forget to pay
  2. Request a Credit Limit Increase
    1. Increasing your total credit limit makes it easier to maintain a low utilization rate. Just make sure to avoid the temptation to spend more money just because your limit is higher!

Credit Debt Payoff Strategies: 

These are two common strategies people use to pay off their debt. Consider which works best with your budget and goals!

Credit Debt Payoff Strategies
  1. Snowball Method
    1. Start reducing your debt by paying off your loans in order, from smallest to largest. Once you’ve paid off your smallest debt, you add the money that would have gone towards that payment and roll it onto the next smallest debt owed. As you pay off your debts, the amount of money you have to pay off your debt gets larger, letting you pay off larger debts faster.  Since you can pay off small debts faster, this method gives you a great sense of progress as you work towards bigger goals.
  1. Avalanche Method
    1. This works the opposite way from the Snowball method. Organize your debts by their interest rate, from highest to lowest. You reduce your debt by paying off the loan with the highest interest rate first. Once you’ve paid that debt off, you roll the money from that payment into the second-highest interest-rate loan until you are done. This method takes care of the most expensive loans first, which can save you money in the long run.

Want help? Email becky+support@kikoff.com

The information provided in this blog post is meant for informational purposes only and does not constitute financial advice. Kikoff Inc. is a financial technology company and not a bank. The Kikoff Secured Credit Card is issued by Coastal Community Bank, Member FDIC. Terms and conditions apply & individual results may vary. Make consistent on-time payments to maximize credit building potential.  Credit factors outside Kikoff, like other account balances or delinquencies, can have an impact on credit building progress.  Subject to approval via identity verifications and subject to terms and conditions. Kikoff Credit Account reported line of credit intended exclusively for credit building purposes & can be used to finance the purchase of monthly Credit Service plans and/or digital educational material via the Kikoff Store. For more information, visit our Terms and Conditions and Privacy Policy. We report to the major credit bureaus: Equifax, Experian, and TransUnion. Features, tradelines, bureau reporting, & pricing may vary depending on plan purchased. This post may contain marketing messages and advertisements in compliance with the CAN-SPAM Act. Please refer to our Secured Card and Credit Account Terms for detailed product disclaimers.

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Credit utilization impacts your score; keep it below 30%. Avoid myths like carrying balances pay in full. Use strategies like Snowball or Avalanche to manage debt and boost financial health.