It’s no secret that Americans have debt. We talk about it all the time. The average American has 4 credit cards, and that’s not even mentioning student loans and other debt. The only problem with debt arises when we can’t pay it off.
Unfortunately, this is the case for many people. Preventing this from harming your score and rebuilding your credit will open so many doors for you throughout your life, and it all starts with understanding how your score works.
Let’s talk about credit utilization, how it affects your score, and how bad credit loans can help!
What Is Credit Utilization?
Essentially, credit utilization is how much of your available credit you use. The portion of the total spending limit you use will play a major role in your credit score. However, this doesn’t apply to all types of credit. This is because if you take out an auto loan and spend it on the car, you’re technically utilizing 100% of your available credit. Of course, it would be unfair to penalize someone for using their loan for its intended purpose. Therefore, credit utilization is determined by your revolving lines of credit, rather than installment loans.
Installment loans are loans with a fixed term, regular payments, and one balance to pay off at the end. Mortgages, auto loans, student loans, and others fall into this category. Conversely, revolving loans are lines of credit that can change depending on how much you spend, and you will have a set spending limit on that line. Credit cards, home equity lines of credit (HELOCs), and others fall into this category.
Although most people don’t have HELOCs, the average American carried around $5,600 in credit card debt. For that reason, credit cards will be our main focus on this important factor.
How Does Credit Utilization Affect Your Score?
Not only does credit utilization affect your score, but it’s one of the primary factors. The most important factors in your credit score are payment history (35%), length of credit history (15%), credit mix (10%), and new lines of credit (10%).
The remaining 30% is entirely dependent on your credit utilization. Again, that’s specific to your credit cards and other revolving lines of credit.
Payment history is only slightly more important, and that’s the most obvious factor on the list. A solid payment history without too many hard inquiries, a healthy credit mix, and a decade under your belt will take your credit score far, but there’s a limit if you utilize too much of your available credit.
So, how much is too much? Glad you asked.
How Low Should I Keep My Utilization?
Ideally, you want to keep your credit utilization under 10% of your credit limit. If you have $20,000 available to you on your credit cards, we suggest keeping that under $2,000. However, there’s an important distinction to make. You can borrow $20,000 at a time if you want, you just need to pay off enough on the balance to bring you below $2,000. Now, 10% isn’t set in stone, that’s just the ideal number. Keeping it under 10% every month will actively help improve your score, assuming you’re still making regular payments. If you keep it under 20% at all times, it shouldn’t cause damage to your score. After a sharp increase in your balance (staying below 20%), you may see a small divot in your score, but it’s unlikely to last.
Keeping your balance under 50% is what really matters to preventing serious damage. If your balance goes above 50% of your total credit limit, you’re likely to see some damage.
Should I Never Leave a Balance?
The only time we would recommend not leaving a balance is if you’re unsure if you can pay it off. In most cases, with the right personal budgeting and planning, it’s actually helpful to leave a balance.
While this may sound counter-intuitive, you should leave a small balance from time to time. Assuming that your credit limit is $20,000, you don’t necessarily want to keep a $2,000 balance on there. That’s because of the interest you will owe. The interest on a $2,000 balance with a 20% APR would be $33 just for the first month, adding up to $400 after a year.
If you want to boost your score, it’s okay to leave a small balance on there, assuming the interest won’t be a problem. Creditors want to see you manage different types of debt, which is why credit mix is a factor in your score. Leaving a balance of 1% or less is perfectly fine and it shouldn’t generate too much interest.
How Bad Credit Loans Can Help
Now that you know the role that credit utilization plays in your credit score, you can work to improve your score for the long haul. However, you may still have some questions.
Fortunately, if you’re looking to pay off your existing credit balance to start rebuilding your credit, there are “bad credit loans” available. What we mean by “bad credit loans” is loans that cater to borrowers with less than optimal credit scores. Even with bad credit, there are lenders that will help you. This way, you’ll have a simple installment payment to clear your balance, and if you make payments on time, you’ll see a boost to your score in no time! Make sure your lender reports on time payments to the credit bureaus and this will help tremendously!
Also, a new loan will help improve your credit mix on your score, lower or eliminate your high credit card balance, and get you on track to your financial goals!
Rebuild Your Score
Now that you know what bad credit loans can do for you, there’s no time like the present to get started. Remember, your credit score affects your mobility in life, so give yourself every opportunity you can get!
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