When it comes to building up your credit score, one of the most important factors to focus on is your credit utilization rate.
Your utilization rate is the percentage of your overall credit that you use each month, and can account for up to 30% of your score. If you have a $5,000 credit limit and spend $1,000 on your credit card each month, that's a utilization rate of 20%.
Experts generally recommend keeping your utilization rate under 30%, ideally closer to 10% if you can. That's because credit card companies view high utilization rates as a red flag that you might not be able to reliably pay back the money you owe.
Even if you pay your bill in full, having an unusually high utilization rate one month can temporarily ding your credit score by as much as 50 points.
If you're on the border between different credit score ranges — 740 to 799 is typically considered "very good" while 670 to 739 counts as "good" and 580 to 669 is "fair" — a 50-point knock can have a significant impact on the types of interest rates you are offered. The higher your credit score is, the more favorable rates you'll qualify for.
To calculate your credit utilization rate, go to your account page on your credit card issuer's website or app and find out what your credit limit is. If you have multiple cards, add up all your credit limits. Next, divide your monthly spending by that figure. Using the previous example, you would divide 1,000 by 5,000 to get 0.2, or 20%.
If you want to lower your utilization rate, there are a few strategies you can take. One is to pinpoint areas of your budget that you can streamline to reduce your overall monthly spend, such as conducting a subscription audit.
If you don't want to lower your spending, another option is to either ask your card issuer for an increase to your line of credit or open up another credit card.
If you do open up a new card, be prepared to juggle multiple payment due dates so that you don't miss any payments and hurt your credit score.
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