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From that scary time your housing association needs your social security number to the time you apply for a mortgage, we all know your credit score is important. For better or for worse it tracks your credit usage and gives lenders (and homeowners) an idea of ​​how you’re managing your debt.

And while some of the criteria for establishing a good credit score may seem arbitrary, it’s important to know what goes into your score so that you can have the best possible.

And that brings us to your use of credit. Although less known and understood than factors such as paying your bills on time, the use of credit accounts for up to 30% of your FICO score. It is therefore important. But what exactly is the use of credit?

Also known as the debt ratio, this is the ratio of your overall outstanding balance to your overall credit card limit. In short, if you have a limit of $ 5,000 on your credit card and your total balances are $ 500, while your credit utilization percentage is 10% ($ 500 / $ 5,000). It is important to note that this only takes into account credit cards and other revolving debt, not installment loans such as student loans or mortgages.

Use of credit 101

A “ good ” use of credit

A “ good ” use of credit the ratio is considered to be less than 30%. Keep in mind, however, that 30% is not a magic number and that lower usage rates can improve your score.

By card versus overall credit usage

Credit scoring models take into account both overall credit usage and credit card usage. The use of credit by card is calculated in the same way as indicated above. Experian describes the consumer’s card debt-to-credit ratio as important, but does not provide details on its importance. Still, as you work to reduce your credit usage, focus on both your overall and card usage.

Credit usage counts differently depending on your credit profile

For those who have had a good credit score for many years, a month with a 32% credit utilization rate is unlikely to have such a big impact on your overall score. It might lower your score a bit, but theoretically it should bounce back soon after.

However, if you’ve just started building your credit, it could have a different effect on your credit. The key here is to understand that changes in a credit report can affect individuals differently depending on a number of factors, some of which are not disclosed by FICO.

Credit usage is important even if you pay off your cards in full each month

If you pay your bill on time every month, you might think you’ll have 0% credit usage. Not true. The amount owed is based on what your credit card issuers report to each credit bureau. It is vastly different for your credit card issuer to send this data on a day when your balance is $ 0.

According to Fair Isaac Corporation:

Your account balance on your credit report will reflect the account balance your lender reported to the credit bureau (usually the balance on your last monthly statement). So even if you pay off your credit card balance in full each month, your account balance won’t necessarily show up on your credit report as $ 0.

So, if you are working hard to increase your score, it is best to keep your credit usage as low as possible throughout the month.

4 tips to reduce your use of credit

If you’re struggling to keep your ratio below 30%, here are some easy ways to keep your credit utilization rate from lowering your credit score.

1. Apply for a higher credit limit

If you’re consistently hitting 30% usage and paying your bills in full each month, consider requesting a higher monthly balance. According to FICO, people with exceptional credit scores regularly use around 7% of their overall credit. This doesn’t mean that using just 7% of your credit will get you a score of 800, but it does show you that a low credit usage rate is one of the factors associated with a good overall score.

2. Set up an automatic balance alert

Since some agencies rate each card for its usage as well as your overall credit usage, set a balance alert on all of your credit cards for some 29% (or less) of your credit line. This way, you will never accidentally exceed your goal of using credit on a single card.

3. Pay your bill twice a month if you have a large expense

If you have a large expense and know you’re going to go over 30%, you could pay off your balance twice that month. This can help you keep your credit usage as low as possible. This isn’t necessarily a good tactic to use every month, but can help in a pinch. the Apple Card will have this feature built into the app that Apple plans to launch later this year.

4. Pay attention to closing accounts used only for rewards.

This advice does not apply to the average consumer. But for those of you in the game of credit card rewards (which you should be), it’s important to remember that closing an account will result in an overall reduction in credit. While this sounds obvious, it’s important to keep this in mind when thinking about your overall credit utilization ratio.

For travel pirates, signing up for a card for its sign-up bonus, and then canceling that account a year later when the annual fee goes into effect, can be a good way to acquire free flights. However, if you overdo it or forget your overall credit utilization ratio, you could end up negatively affecting your credit score. For example, if you cancel a card but forget that it means your overall limit is $ 1,000 lower, you could end up reaching a higher credit utilization rate by accident. Canceling cards can also reduce the overall “average age” of your accounts, which can also negatively impact your score.

On the flip side, an always-active credit account that you don’t actually use can boost your score. So make sure before canceling an account that it will not significantly affect your overall credit utilization ratio. Spitting out annual fees could be more profitable, in the long run, than damaging your credit score, especially if a big purchase – say a house – is on the horizon. (You can learn more about how your credit score affects your mortgage rate. here.)