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According to Experian, the average credit score in the United States was just over 700 in 2019. Thatâs considered a good credit scoreâand 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 monthâknown as the minimum paymentâdepends 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 âcredit utilizationâ or your âdebt-to-limit ratio,â 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.
Hereâs how to determine your individual and overall credit utilization:
- 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).
- To calculate individual utilization percentage on an account, divide the balance by the credit limit, and multiply that number by 100.
- $500/$1,000 = 0.5
- 5*100 = 50%
- 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.
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.comâs 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 bureausâplus exclusive discounts and cashback offers as well as other featuresâfor less than $25 a month.
The post Credit 101: What Is Revolving Utilization? appeared first on Credit.com.
If youâre serious about your credit score, you need to pay your bills on time. One late payment can have a devastating effect on your credit score. Hereâs what you need to know about late payments and your credit score, and what you can do to protect yourself.
How Late Payments Affect Credit Scores
Your payment history is the biggest factor in determining your credit score, so itâs imperative that you pay your bills on time whenever possible. If you do make a late payment, there are three factors that determine how much it will affect your credit score.
- Your credit score and credit history
- How long ago the late payment was
- How severe the late payment was
According to FICOâs credit damage data, one recent late payment can cause as much as a 180-point drop on a FICO score, depending on your credit history and the severity of the late payment.
Your Credit History and Late Payments
The impact of a missed payment on your credit score varies significantly depending on your circumstances. The better your credit, the more you may feel the sting of a late payment. In fact, that 180-point drop mentioned earlier is most likely to happen to an individual with excellent credit who is 90 days late on a payment. Because individuals with good and excellent credit donât have a history of risky behavior, one mistake sends up a red flag that can drop their score more dramatically.
Individuals with a shorter credit history will likely see a dramatic decrease in their score after a late payment as well. Because there is less information available on your financial behavior, a late payment is a bad sign. On the other hand, individuals with lower credit scores already have a history of risky behavior, so one more late payment wonât drop their score as much.
How Time Affects Credit
The more recent a late payment is, the more severely it will affect your credit score. A missed payment remains on your credit report for up to seven years from the date it occurred. The overall impact of the late payment diminishes over time and goes away completely when the missed payment ages off your report.
Your score won’t necessarily jump 100 points simply because a late payment ages off or is removed. Even though a late payment might have originally dropped your score by a good number, the impact of that late payment changes over time. How much your score goes up when a late payment is removed depends on a variety of factors, so youâll want to continue practicing smart financial habits like making payments on time and keeping your credit utilization low.
How Severity Affects Credit
If you missed your credit card payment by one day, you probably don’t need to sweat it. In most cases, lenders and creditors have grace periods that can range from a few days to up to 10 days. Grace periods are meant to account for minor mistakes and lag in mailing or posting payments. If your payment arrives within that time period, the lender may not count it as late.
Most lenders donât report missed payments until your account is 30 days past due. After 90 days, the effect on your credit score will be even more drastic.
Make sure to read the fine print on your account agreement, though, to know if you have a grace period. And avoid falling into the habit of relying on the grace period. If you’re used to paying your bill five days after the actual due date, you could miss the grace period if you experience a personal emergency. Also keep in mind that interest and fees may still apply during the grace period, even if your payment isnât reported as late to the credit bureaus.
How to Protect Your Credit History Against Late Payment Impact
Payment history is a huge part of your credit score. It accounts for around 35% of your scoreâover a third. Take action to ensure late payments aren’t impacting your score when they don’t need to. Here are three tips for doing so.
1. Check Your Credit Score and Report Regularly
Check your credit reports frequently to ensure late payments aren’t being reported inaccurately. A simple clerical error is enough to cause your score to go down. If you see inaccurate information on your credit reports, you can and should challenge it and ask for verification.
You can get a free credit report annually from each of the three credit bureaus. Due to the COVID-19 crisis, you can get your free credit report once a week through April 2021. When you request your credit report from AnnualCreditReport.com or the individual credit bureaus, you wonât also see your credit score. If you want to see both at the same time, consider signing up for ExtraCredit. Youâll see 28 of your FICO scores from all three credit bureaus, plus your credit reports from each.
2. Use Tools to Help You Make Timely Payments
Avoid late payments by using resources that ensure you make payments on time each month.
- Sign up for auto payments. Your lender may offer this option, letting you enter a credit or debit card or checking account and taking payments out of that account each month. The benefit is that you can set and forget your payments, never worrying that they’re late. The disadvantage is that you have less flexibility in when you pay each month, and you have to ensure you keep a balance in your account to cover the charges.
- Use apps or phone alarms. Remind yourself to make payments with app notifications that let you know the payment date is arriving soon. Many credit card companies and other lenders offer options for receiving such notifications directly from them.
- Make smaller, more frequent payments. If you’re struggling to save enough to cover a large bill each month, pay a portion of what’s owed every week. This can help simplify your budget, though you do need to ensure you’re not being charged convenience fees or other amounts every time you make a payment.
3. Ask for One-Time Late Payments to Be Forgiven
Life happens, and creditors are aware of this. So if you do find yourself making a one-off late payment, contact your creditor.
Apologize for the late payment, let them know it’s not a normal occurrence for you and point to your previously pristine payment history. Ask the creditor to waive late fees and interest charges as a courtesy and not report the late payment to the credit bureaus. It’s a tool you must use sparingly, but creditors may to oblige if you really do normally pay on time.
Your Credit Score Will Thank You
Making all your bill payments on time is one of the best ways to keep your credit score happy and healthy. Keep track of how youâre doing by signing up for ExtraCredit.
The post How Much Does One Late Payment Affect Credit Scores? appeared first on Credit.com.