September 17, 2012 3:34 am
Credit scores do not distinguish between balances you are paying off, it only looks at the new charges you are racking up. If you want to keep your credit score high, it is of dire importance that you keep those balances low.
To calculate your utilization ratio, add up last month’s balances and divide that by the total of all your credit limits on open accounts. The two-digit number after the decimal point is your utilization rate. Do the same for each individual card as well—FICO scoring looks at how much of your total limit you’re using, along with each card individually. Utilization is a significant portion of your scoring—30 percent. It is recommended that you try to achieve the lowest score possible. Those with the highest credit scores, 760 or above, usually have a utilization of approximately 7 percent.
Know the Difference between Charge Cards and Credit Cards
The main difference between charge cards is that they require you to pay the balance in full every month. They also aren’t included in your utilization rate, according to the most recent versions of the FICO scoring system. If you have a card and are unsure if it’s a charge card or credit card, call the issuer or check your latest credit report. Notations indicating “revolving” mean it’s a credit card; notations stating “open” means it’s a charge card.
Experts say that worrying about utilization rates or credit scores is unnecessary, but it can pay off to look more closely if you are a year or less away from purchasing a home or car, have unexplained card problems such as declining credit scores, or if you have a new card and want to see its impact on your credit score.
Understanding your credit can be extremely important, especially in situations when you need to rely on a good, solid credit score. By keeping your balances low and properly managing your credit card usage, you will hopefully never be financially limited by a poor credit score.
Published with permission from RISMedia.