The amount you owe contributes 30% to your credit score. This is great news as you can likely improve your score here fairly quickly. The amount you owe is actually all about how much you owe compared to how much credit is available to you. Less is more – you don’t want to use any more than 1/3 of the credit that you have available to you. Even if you pay off your balance every month!
Two example savers make this more concrete
Credit User A has one credit card with a $1,000 limit and another with a $500 limit. His monthly bills average $900 and $450 all of which he pays off in full on and on time every month.
Credit User B has one credit card with a $10,000 limit and another with a $5,000 limit and a final with $500. His monthly bills average $2,000, $1,000, and $450 all of which he pays off in full and on time every month.
Credit User A likely thinks he is being responsible and only obtaining the credit limits he needs. However, credit rating agencies would give Credit User B a higher score. He has shown he will doesn’t use the maximum credit available to him. The logic is that if Credit User B was extended more credit the credit rating agencies expect the same behaviour.
Three steps will improve your credit utilization:
1. Pay off your debt. Having outstanding debt hits you twice. In your payment history and in your utilization as it will likely push you closer to your limit.
2. Call your credit card provider and ask for a credit limit increase. You are targeting at least 3x what you usually spend per month. <- only do this if it wouldn’t tempt you do spend more 3. Make sure you don’t spend more on your new higher limit! Remember you are showing how responsible you are!