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When you open a credit card, you'll often hear advice on keeping a low credit utilization rate in order to achieve a good credit score.
Credit utilization is the percentage of your total credit you're using, also known as amounts owed. Your credit utilization is the second-most important factor of your credit score (behind payment history), so it's therefore essential to learn all you can about maintaining a healthy ratio.
The general rule of thumb is to keep a credit utilization below 30%, but a FICO study found that "high-achievers" — consumers with credit scores 750 and above — use less than 10% of their total available credit limit. You should aim to keep your credit utilization rate as low as possible in order to avoid hurting your credit score, but not necessarily as low as 0%.
While free credit score resources provide your credit utilization rate, it may only be updated once a month, so you may want to do the math yourself in between updates. Below, CNBC Select reviews how you can calculate your credit utilization rate.
In order to calculate your credit utilization rate, you'll need to gather some information about your credit card accounts. (Take note, charge cards are not factored into your credit utilization rate since they have no predetermined credit limit.)
Once you have your credit products, gather the balance and credit limit for each card and begin calculations.
Let's take an example where you have three credit cards:
To find your utilization rate, divide your total balance ($4,000) by your total credit limit ($20,000). Then, multiply by 100 to get the percentage.
Here's the math: $4,000 / $20,000 = 0.2 x 100 = 20%
You can also calculate your utilization rate separately for each credit card, but your credit score focuses on your total credit utilization rate across all cards.
Your credit utilization is influenced by three main factors: the opening or closing of accounts, the balance and the credit limit on your accounts.
If you open a new credit card and maintain the same spending as before, you'll see an increase in your credit limit, which boosts your credit utilization rate. But if you close a credit card, that decreases your total available credit limit and reduces your credit utilization rate, which may cause a dip in your credit score.
When you increase spending on one or more credit cards, your utilization rate will increase as well. This can lower your credit score.
On the other hand, a decrease in spending and/or an increase in your credit limit can result in a lower utilization rate and higher credit score.
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