Credit Utilization

Credit Utilization: What It Is and How It Impacts Your Credit Score

Throughout the world, people are looking for ways to diversify their economic capacities. In the wake of the pandemic, it’s clear that people need to have greater economic flexibility. Building your credit is a good way of increasing your flexibility.

What Is Credit Utilization?

Whether you realize it or not, your credit utilization rate (CUR) is an important number. This is a number that can greatly affect your future financial prospects. Simply put, this is the amount of revolving credit currently used divided by the total amount of credit you can access. Put in other terms, your CUR is the amount you owe divided by your outstanding borrowing limit.

Credit Scores

The precise formula used to determine your credit rating is not known to the public. Nevertheless, the public is privy to certain knowledge about how credit scores are built. A low CUR is generally a good sign that you are capable of using credit responsibly. Still, one shouldn’t think that it is ideal to never use their credit capability. To establish a strong credit score, you should use credit modestly yet consistently. This will give you the tools you need to thrive during times of economic distress. When the world is wracked with economic hardship, good credit can help you establish economic resiliency.

How CUR Affects Your Credit Rating

When you have a low CUR, this shows that you are less dependent on credit. Naturally, this will give you a better position when it comes to making financial plans. The higher your credit score, the simpler it is to make the financial decisions that lead to financial independence. With a higher credit rating, you can access car loans, home loans and other loans that may have once seemed out of reach. Revolving credit is the key to maintaining flexible credit relations for the future. CUR is strictly based on your flexible lines of credit. In other words, your mortgage and auto loans do not affect your CUR. Instead, the CUR is affected by available, liquid credit.

There is no one-to-one relationship between your CUR and your credit rating. In other words, lowering your CUR won’t automatically or immediately lead to a higher credit rating. Nevertheless, a lowered CUR will ultimately help you move in the right direction.

CUR and Auto Refinancing

According to Lantern by SoFi, refinancing a vehicle is “taking out a new loan to pay off your existing car loan.” Supposing your financial situation has improved since you took out the original loan, you may well qualify for a better interest rate. Refinancing your loan could help you improve your life and lower your bills significantly. The lower your CUR, the more likely it is you can refinance successfully.

Opening New Credit Cards

Despite what you may think, opening new credit cards is a good way to improve your CUR and your credit rating. As long as you exercise caution and prudence, opening new lines of credit can prove to be great for your finances.

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