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Credit Utilization Rising, Likely Hurting Credit Scores

Credit utilization, a major credit scoring metric, is on the rise, according to a recent report from credit reporting agency Experian.

The company noted that cardholders are utilizing, on average, more than 30 percent of their total available bank card balances.

That’s nearly a 10 percent jump from 2007, which could be attributed to a combination of credit card issuers cutting limits and consumers having more trouble paying down debt.

Unfortunately, this means that those with higher utilization rates are probably seeing their credit scores drop as a result.

Experian’s own VantageScore credit score relies heavy on credit utilization – in fact, it accounts for 23 percent of a consumer’s credit score, just behind recent credit and payment history in terms of importance.

Balances are also part of the credit scoring algorithm, so consumers are probably getting hit twice.

That’s why it’s important to keep debt in check, and certainly never close to your limit (how to improve credit score).

Let’s look at an example of credit utilization:

Outstanding credit card debt: $4,500
Aggregate credit card limit: $15,000
Credit utilization: 30%

This is what the average consumer looks like, according to the data. Those with larger debt balances and lower overall credit limits will likely see credit scores fall below the national average.

So if you want to maintain a good credit score, be sure to charge sparingly, assuming you can’t actually pay it all off each month.

Otherwise, you’ll be perceived as overextended, and may have trouble obtaining new credit in the future.