hi everyone, today I'm going to talk to you a little bit about what is the credit utilization rate? in 2022 why does it matter and answer the question that I get all of the time? is there a negative impact on my credit score if I have too many credit cards or on the same thread. what is the limit of credit cards that I can get?
WHAT IS A CREDIT UTILIZATION RATE?
so before we really jump into it just something that you need to understand is something called a credit utilization rate.
so when your credit score is calculated it's based on a lot of different factors.
one of those factors is what is the length of your accounts so how long have you had it bounced open.
do you have any situations where you didn't pay your bill where you were late on paying your bill?
but then one really important factor that is helped that that is used rather than in determining what your credit score is. is something called your credit utilization rate.
now this is it's a really complex term for something that's actually really simple.
the credit utilization rate just refers to what's the total amount of credit that you have access to over how much of that credit are you actually using on an ongoing basis.
so let me make it really simple if you have a total credit line between all of your credit cards of $10,000 so maybe I'm one card you have $2,000 another card you have $3,000 and then on another part, you have $5,000.
so in total, you have a total accessible credit of $10,000. then let's say on a monthly basis you actually swipe your card and you're putting $1,000 in purchases on those cards on an ongoing basis.
in that situation your credit utilization rate would be 10% right you're using $1,000 of a total credit line of $10,000.
So what is really important about the credit utilization rate is obviously to lower that number is the better it is for you.
because what that says the lenders if you have access to $100,000 in credit but you're only using $1,000 a month.
then they're saying this person doesn't actually need all of the credit they're a more responsible person they're taking good control of their finances and they don't need all of the credit that they have access to.
from what I understand an ideal credit utilization rate is below 10%. anything underneath 10% it's going to help your credit score in the long term as a positive factor.
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THINGS TO KEEP IN MIND ABOUT CREDIT UTILIZATION RATE
now one really important thing to keep in mind in terms of a credit utilization rate is the lower your accessible line of credit is the harder it is going to be to have a low credit utilization rate.
for example if my total credit line is $1,000 in every single month I know my expenses are gonna be $500 then I'm already going to be utilizing fifty percent of my total accessible credit.
versus if I build that credit line up to maybe $10,000 I can still keep my spending exactly the same but my credit utilization rate is gonna be lower which is gonna help my credit score.
so the point being and why I always try to push people to get credit cards with no annual fee is because all that's gonna help you do overtime is it's gonna give you more credit cards that are you're gonna keep open hopefully forever.
which is going to increase your length of accounts which is a positive thing longer the better.
also, it's going to decrease your credit utilization rate because now you're gonna have multiple cards with larger balances with a larger line of credit which is going to give you more accessible credit and as long as you're spending stays the same it's gonna help your credit score over the long term.
the other quick recommendation that'll make is on an ongoing basis what you can actually do is request credit increases from your current credit cards that you have.
so the thing is as you go and request more additional credit from your lenders it's just going to give you like I said earlier it's gonna give you access to more credit and if you keep your spending the same it's going to help you over the long term.
So that's it for today hope you understand what is a credit utilization rate & how to maintain your credit score using some recommendations.