What's Pie Got To Do With It?

Understanding Credit Utilization and Using it to Tweak Your Own Credit Score

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February 16,  2020

Have you ever heard of Credit Utilization?

Some of you probably have and many of you haven’t. But what exactly is credit utilization and how can it affect my credit score.

Credit utilization is a comparison of the total amount of credit you have available to the total amount of credit you have used, otherwise known as your “balance” . It’s the banks way of assessing how responsible you are handling the credit you currently have. Its used when applying for new credit accounts, including, but not limited to:

  • Lines of credit
  • Mortgages
  • Car loans,
  • All credit cards

It’s commonly displayed as a percentage.

Let’s try an example here:

Let’s say you have 2 credit cards.

Credit Card A has a total credit limit of $5000.

Credit Card B has a total credit limit of $5000.

Your combined credit limit is $10,000.

Credit Utilization as Dollar Value
Credit Utilization as a Dollar Value

Now let’s say you have a balance of $1500 on Credit Card A.

And you also have a balance of $1500 on Credit Card B.

You have a total balance between both cards of $3000

Following me so far? Pretty easy.

So you have a total balance of $3000 against the total credit limit of $10,000.

You are using 3/10 of your total credit limit. Instead of using a fraction let’s use a percentage and call it 30%.

That’s a 30% utilization of your credit. Banks like this. Banks like it even more if it’s lower but at its maximum 30% is a good number to strive for.

Pie Graph - Total Utilization Comparison

Now let’s change it up a bit.

We’re going to leave Credit Card A alone, but we’re going to change Credit Card B and imagine the total credit limit from is only $2000. However the balance will remain unchanged at $1500.

So now, on credit card B, you are using $1500 of your available $2000 and your credit utilization on this card is 75%.

Banks do not like this number.

On Credit Card A you are still using $1500 of $5000 so this remains at 30% utilization.

Combined the two credit cards have a total available limit of $7000 ($5000 + $2000) and the total combined balance is $3000 ($1500+$1500) so your credit utilization between these two cards is approximately 43%.

How do we arrive at this number?

$3000 / $7000 = 0.42857 or rounded up to 0.43 is 43%. Not as bad but still affecting your credit score. Room for improvement, shall we say.

So you can either pay off some of the balance of Credit Card B to lower your utilization or on the flip side raise the limit of Credit Card B and effectively create the same outcome.

If you ask the bank issuer of Credit Card B for a credit raise of $3000 and they approve it, you will have taken your combined utilization from 43% to 30% and your single card utilization on Credit Card B, from 75% to 30%.

Not bad for a days work!

The goal here is to get your balance to be 30% of your total available credit and from the perspective of the banks it makes sense. 

You still need to be responsible with your credit allowances and combining that with some savviness and know-how can go a long way towards your future.

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