Keep Your Utilization Low

One of the items that factors into your credit score is utilization. It is a somewhat significant factor. Utilization can best be defined as the percentage of your overall credit limit that you’re using. So if I have a $1,000 credit limit and I utilize $450 of that credit line, my utilization rate is: 45%. Most people suggest that you keep your credit utilization rate under 30%. Anything over 30% will typically cause your credit score to drop.

It is also worth noting that credit utilization has no memory. What this means is that if you had high credit utilization 4 months ago and were able to lower your credit utilization the following month. The effect of that high credit utilization has on your credit score will go away after a couple months.

My Utilization Goal

I typically try to keep my utilization around 2-3%. Financial institutions (i.e. Chase, CitiBank, American Express) will typically report your balance to the credit bureau when your statement closes. Now remember there is a difference between statement close and due date. The statement close is when the bank basically says you owe us this much and it is due on this date. The due date is whenever the payment on your statement balance is due.

A Practical Example

What we are focusing on here is the day that your statement close. As I noted above, most financial institutions report your balance when your statement closes. This means if you’ve racked up $700 of charges on your $1,000 credit line. It will report as 70% utilization rate. However, let’s say two days before your statement closes you make a payment of $500. This reduces your outstanding charges to $200. This means when the statement closes your utilization rate will be 20% instead. This is how I manage to keep my utilization low while also putting hundreds of dollars worth of charges throughout the month.

This is what a typically month looks like for me on my $5,000 credit line card:

  • Statement Close: February 5th
  • February 6-March 4:
    • Spend: $1,500
    • Payment: $1,300
  • Statement Close: March 5th
    • Statement Balance: $200
    • Credit Utilization Rate: 4%

Attempting to keep your credit utilization low will also teach you good spending/payment habits so that you don’t rack up credit card debt.