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Credit 101: What Is Revolving Utilization?

Aerial view of a young woman with brown hair contemplating her revolving utilization. She has a pen in her mouth and an open notebook on her desk.

According to Experian, the average credit score in the United States was just over 700 in 2019. That’s considered a good credit score—and if you want a good credit score, you have to consider your revolving utilization. Revolving utilization measures the amount of revolving credit limits that you are currently using, and it accounts for a large portion of your credit score.

Find out more about what revolving utilization is, how to manage it, and how it impacts your credit score below.

What Is Revolving Credit?

To understand revolving utilization, you first have to understand revolving credit. Revolving credit accounts are those that have a “revolving” balance, such as credit cards.

When you are approved for a credit card, you are given a credit limit. If you have a credit card with a limit of $1,000 and you use it to buy $200 worth of goods, you now have a $200 balance and an $800 remaining credit limit.

Now, if you pay that $200, you again have $1,000 of open credit. If you pay $150, you have $950 of open credit. But your credit revolves between balance owed and how much open credit you have available to use. How much you have to pay each month—known as the minimum payment—depends on how much your balance owed is.

Other forms of revolving credit include lines of credit and home equity lines of credit. They work similar to credit cards.

What Isn’t Revolving Credit?

Unlike revolving credit, installment loans involve taking out a lump sum and paying it back in an agreed-upon fashion over a set term of months or years. Typically, you agree to pay a certain amount per month for a certain number of months to cover the amount you borrowed plus any interest.

With an installment loan, the amount of your monthly payment is determined by your loan agreement, not the balance due. Common types of installment loans include vehicle loans, personal loans, student loans, and mortgages.

What Is Revolving Utilization?

Revolving utilization, also known as “credit utilization” or your “debt-to-limit ratio,” relates only to revolving credit and isn’t a factor with installment loans. Utilization refers to how much of your credit balance you’re using at a given time.

Here’s how to determine your individual and overall credit utilization:

  1. Look at your credit reports and identify all of your revolving accounts. Each of these accounts has a credit limit (the most you can spend on that account) and a balance (how much you have spent).
  2. To calculate individual utilization percentage on an account, divide the balance by the credit limit, and multiply that number by 100.
    1. $500/$1,000 = 0.5
    2. 5*100 = 50%
  3. To calculate overall utilization (all revolving accounts), add up all of the credit limits (total credit limit) and all of the balances (total spent) on your revolving accounts. Divide the total balance by total credit limit, and multiply that number by 100.

If you have a credit card with a $1,000 credit limit and a balance of $500, your utilization rate is 50%, for example. For the same card, if you have a balance of $100, your utilization rate is 10%.

When it comes to your credit score, revolving utilization is typically calculated in total. For example:

  • You have one card with a limit of $1,000 and a balance of $500.
  • You have a second card with a limit of $4,000 and a balance of $400.
  • You have a third card with a limit of $3,000 and a balance of $600.
  • Your total credit limit across all three cards is $8,000.
  • Your total utilization across all three cards is $1,500.
  • Your revolving utilization is around 19%.

How Can You Reduce Revolving Utilization?

You can reduce revolving utilization in two ways. First, you can pay down your balances. The less you owe, the less your utilization will be.

Second, you can increase your credit limit. If you apply for a new credit card but don’t use it, you’ll have more open credit, and that can reduce your utilization. You might also be able to ask your credit card company to review your account for a credit increase if you’re an account holder in good standing.

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What Is Revolving Utilization’s Impact on Your Credit Score?

Your revolving utilization rate does impact your credit. It’s the second-largest factor in the calculation of your credit score. Your utilization rate accounts for around 30% of your score. The only factor more important is whether you make your payments on time.

Why is credit utilization so important to your score? Because to lenders, it can say a lot about you as a borrower.

If you’re currently maxed out on all your existing credit, you may be struggling to pay your debts. Or you might not be managing your debts in the most responsible fashion. Either way, lenders might see you as a riskier investment and be less inclined to approve you for loans or other credit.

How Do You Know If You Have a Revolving Utilization Problem?

Sign up for Credit.com’s free Credit Report Card. It provides a snapshot of your credit report and gives you a grade for each of the five areas that make up your score. That includes payment history, credit utilization, age of credit, credit mix, and inquiries. The credit report card makes it easy for you to see what might be negatively affecting your credit score.

You can also sign up for ExtraCredit, an exciting new product from Credit.com. With an ExtraCredit account, you get a look at 28 of your FICO scores from all three credit bureaus—plus exclusive discounts and cashback offers as well as other features—for less than $25 a month.

Sign Up Now

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The Best Things to Charge on Your Credit Card When You’re Rebuilding Credit

Charging a few small, easy-to-pay-off items to your card each month can help you rebuild credit.

If your credit needs rehabilitation due to late payments, accounts in collections or other negative items, it might be time to rebuild. Rebuilding your credit requires an understanding of your current situation, identifying past mistakes and implementing the right strategies going forward.

Wise use of a credit card is one way to start. Surprising, right? But if you use that plastic correctly, it really can help you. Good credit card strategies include keeping a low balance, making payments on time and paying your balance in full each month. To do that, it’s best to start small and only charge things that won’t kill your credit building project before it takes off. (You can check on your progress with a free credit report snapshot on Credit.com.)

Here are a few things you can charge on your credit card to help you boost that score.

Gas

The cost of gas can add up, but if you already have room for gas in your monthly budget, you can charge your gas expenses and pay them off in full using the funds in your bank account. Some credit cards offer special cash back rates on gas purchases so you can earn a little money back in your wallet (although getting a new unsecured credit card might not be the best move for you at this stage as the inquiry will cause your score to take even more of a hit).

Groceries

Groceries are another staple you likely already have built into your budget. Instead of handing over cash or a check when you pick up the necessities for the week, charge your groceries to your credit card and pay those purchases off in full each month. There are several credit cards on the market that offer special cash-back rates on groceries, as well.

Streaming Services

Monthly streaming services usually cost less than $20 a month. You could conceivably set up your credit card to pay for a streaming service, pay it off in full each month and never use it for anything else.

Balance Transfers

If you have a large balance on a high-interest credit card, it could be damaging your credit score and affecting your ability to make your payment. If you have a lower interest credit card, you can transfer the balance and reduce the interest. If you can qualify, a card with a long 0% intro APR period can help you pay your balance off interest-free.

(Cheap) Dining & Recreation

It’s probably not a good idea to use your credit cards at the club or restaurants, as it’s easy for costs to spiral out of control. But if you’re on a date at the movies or taking the kids out for mini golf and milkshakes, low-cost dining and recreation purchases might be a safe bet.

Small Everyday Expenses

Sometimes you have to run into a local store for a roll of duct tape or some socks. Small everyday purchases can be fairly easy to pay off in full.

Using Your Credit Card Wisely to Build Credit

For the most part, small purchases you can afford to pay off each time the statement arrives are the best things to put on your credit card, as payment history is the biggest influencer of your credit scores. Plus, carrying a balance means you’ll be hit with interest and it will take you longer to pay down your balance.

But even relatively small purchases can threaten your credit if they pile up too quickly. (Credit experts recommend keeping your credit utilization ratio — that is, your amount of debt in relation to your credit limit — at 30%, ideally 10%.) So, a good practice is to treat your credit card like cash and only purchase things you can cover with available funds.

Have any questions about improving your credit? Ask us in the comments below and one of our credit experts will do their best to help.

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The post The Best Things to Charge on Your Credit Card When You’re Rebuilding Credit appeared first on Credit.com.

Source: credit.com