How Long Does Credit Utilization Affect Score?

What is the impact of the credit utilization ratio on credit score and how long does it last?

Your credit utilization which is the amount of credit that you are currently using compared to the total amount of credit that is available to you is also an important factor affecting your credit score. This raises the question of how long the high or low credit utilization affects the scores among people. Here is the plan.

What Is Credit Utilization?

The credit utilization ratio reflects the percentage of available credit limits of the revolving credit that is being used from time to time. Financial experts define CLTV by using the total credit card balances that you currently have against the total credit limits offered to you. For instance, if you had a total of $2000 balance on all your cards and had a total credit limit of $10000, your credit utilization ratio is 20%.

Credit scoring models refer to this percentage to understand how you have utilized your credit and how likely you are to borrow more against your total capacity. In this case, the utilization rate is inversely proportional to the score you get; the lower the rates the better.

How Frequently Does Your Credit Utilization Affect Your Credit Score?

This is the opposite of late payments or collections accounts that can significantly harm your credit now and in the future, credit utilization’s effect is relatively short-term. Your utilization rate is recalculated every month when your credit card company submits your latest statement balance to the credit bureaus.

The second aspect that affects the credit scores is the alteration of the data as soon as the information regarding it is reported. It is important to note that your scores will also change every month depending on whether your utilization rate increases or decreases.

The good news about utilization rates is that if you have a high rate one month, you can likely lower it the following month and bring up your scores. Any dips from high utilization should only have a slight negative impact on your scores.

High utilization ratios are damaging to your credit scores because:

High utilization is perceived as negative because credit scoring models believe that a consumer who is over-indebted or predominantly using credit cards is a bad credit risk. While your payment is up to date regularly, showing a high utilization ratio warns your lenders. Still, the credit card limit can put you on the way to missing payments, failing to make payments, or other fees such as over-the-limit fees in a few years.

Credit experts suggest that at no point should a consumer use more than 30% of their total available revolving credit line. There are even sources that advise maintaining utilization under 10 percent if you want to get the highest scores. If your utilization rises above 30%, your scores can begin to decrease. If utilization goes beyond 50%, you may witness a sharp drop in credit scores as a possibility.

High credit utilization for how long it affects your credit

The first thing to note is that the effect of high credit utilization is partly moderated by your credit history profile and scores. If you have a long credit history, a good mix of accounts, and low credit utilization in the recent past but went over 30% one month, your scores will only drop slightly.

In contrast, if you do not have a long credit history or if you are one who frequently crosses the 30% utilization rate, it may pull down your scores considerably.

In either case, as soon as you manage to bring your utilization below 30% the next month, your scores usually come back almost instantly. So, while high utilization negatively impacts credit scores in the short run, it is not an artifact that will linger around your credit reports for years as is the case with late payments or collections.

A way to reduce the tension arising from high levels of utilization is to:

If an unusual expense pushes your credit card balances higher one month, there are a few things you can do to minimize the negative impact on your scores.

• Pay a little more before the statement closing date to reduce the reported balance. This in turn reduces your utilization rate.
• See if your card issuer will raise your credit limit. Lower overall limits imply higher use, and vice versa.
• Do not charge the expense on a card that has reached its limit to ensure that the credit limit is not reached.

This can also entice you to pay your balance back down for a couple of months to allow your scores to gain more ground. However, your efforts should be seen in the new credit reports and updated scores within 60 days.

Is Very Low Utilization Beneficial for Your Scores?

What about those who maintain utilization at very low levels – below 5% for instance? Theoretically speaking, very low utilization is good for your credit score because credit providers see that you are not stretching yourself and are only using a small proportion of the total credit available to you. The latter is true in practice where at some threshold the impact is observed to reach a plateau.

This means, that such a decline from 80% down to 30% will result in great improvements in scores while such a decline from 1% to 0% will not affect anything. That is because, at some point between 0-10%, you have gone below the breakpoint where any further reduction in utilization adds to your scores.

Another study, which compared credit reports for 5 million consumers, revealed that consumers who had utilization below 10% did not experience any improvement compared to consumers with utilization ratios ranging from 10-20%. In layman’s language, if you have $10000 of total credit limits, having a balance of $0-$1000 on your cards is best for your score. Thus, going from that level down to zero is of little consequence.

Thus, you can make a full payment of your monthly bill and let the small balances appear on your statement if they do. It’s just that one shouldn’t intentionally take on debt and hold interest to gain some small improvement in one’s credit score. Besides, your long-term financial health is way more important than a minor extra score bump from a super-low utilization rate.

The Takeaway

Credit utilization has massive effects on your scores in the short run, but for this part of your credit report, you have a lot of control on a month-to-month basis. The best scenario is to maintain the level of utilization below 30% – or even below 10% – regularly and, in this case, you will observe very good scores. If your utilization increases temporarily one month due to a large purchase or lowered credit limit, do not stress, just bring it back down the next month. It should get back to normal within 60 days as it was when it dropped in the first place.

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