What is renewable use and how to use it

Revolving usage is an important factor that can impact your credit ratings. This is often the main reason why your credit scores change from month to month. But usage can be confusing, so let’s break it down here and help us use it to your advantage.

If you’ve seen the FICO score formula, debt is one of the biggest factors affecting credit scores (second only to payment history) and usage is an important part of that calculation.

What is a good renewable utilization rate?

Revolving usage (i.e. debt usage or debt usage) looks at your revolving account balances, primarily credit cards, and compares them to your available credit. However, this is not necessarily a representation of your debt, as this factor can affect your credit scores, even if you pay off your balance in full each month. (More on that in a moment.)

Revolving usage compares the balance on each of your credit cards to your credit limit. Here is a simple example:

Credit card balance: $350

Credit card limit: $1,000

Usage = 35%

To arrive at this formula, simply divide your balance by the credit limit and move the decimal point two spaces to the right. In our example:

350 divided by 1000 = 0.35

Move the decimal point two spaces to the right to get 35%

You may have seen articles referring to 20, 25, or even 30% or less as good usage percentages, but the real answer is “it depends.” There are many different scoring models and they will take all the information from your credit profile into account. An acceptable usage rate for one person may be a little too high for another.

For most people, however, a low credit utilization ratio means keeping balances below 20-25% of available credit. Usually, a utilization rate in this range will contribute to a good credit rating.

Usage per card vs total usage

Credit card usage is calculated on both individual revolving credit accounts and all revolving accounts added together. Most credit scoring models compare total revolving balances to total available credit. This means that the overall use of credit is important.

Just as one rotten fruit can make the whole lot bad, one card with high usage can cause your credit score to drop. This article, A Little-Known Trick That Can Improve Your Credit Scores This Month, includes a real-life example of how it happens.

If you have a card with much higher usage than others and your primary goal is to build or maintain strong credit scores, you may want to focus on paying off that card with a high balance before to pay extra on others.

On the other hand, if this factor doesn’t lower your credit scores, don’t worry. Usually when you check your credit scores you will be given the main factors affecting your scores and if usage or balances are not on the list you may not need to do anything.

It’s a good idea to check and monitor your credit reports and scores with the three major credit bureaus: Equifax, Experian and TransUnion. Read: 138+ places to check your credit scores for free

5 ways to improve your credit utilization rate

It’s important to keep in mind that this factor is based on the credit balances and limits that appear on your credit reports at the time your credit score is calculated. Most credit card companies report balances on a monthly basis, around the time your credit card statement is closed. This date is shown on your credit card statement. You will understand why this is important in a moment.

Also keep in mind that the type of credit matters here. Installment loans (such as car loans or mortgages) do not calculate usage in the same way. Here, the main focus is on credit cards and lines of credit. Home equity lines of credit may be included, but not always.

With that in mind, here are six strategies to improve your credit utilization rate:

  1. Pay off your credit card debt. Paying down revolving debt balances and keeping them low is a great way to improve utilization. It can also be a quick way to improve your credit scores if using debt reduces them.
  2. Request a credit limit increase. A higher credit limit can improve individual account usage and contribute to a higher total credit limit. Most credit scoring models don’t care if you have “too much available credit”, although VantageScore assesses this factor.
  3. Open a new credit card. Use a balance transfer to a new card to help pay off a credit card with a higher balance. If you get a low-interest balance transfer, you can also save money on interest.
  4. Refinance credit cards with a personal loan. As mentioned, the usage applies primarily to credit card accounts. A personal loan is generally classified as an installment account, so it may be beneficial to use one to pay off credit cards. (However, there is no guarantee.)
  5. Pay earlier. Remember when we mentioned that most credit card issuers report at the end of the billing cycle? This means that if you pay off your card around the due date, that month’s payment will arrive too late to reduce the reported balance. Instead, you may want to make payment online several days before the end of the billing cycle to help reduce the reported balance.
  6. Use a business credit card for business financing. Many small business credit cards don’t fall under personal credit unless you pay off the debt. This means that the balances you carry on these cards will not hurt your personal credit ratings, although they may affect some business credit ratings.

How opening a business credit card could help your revolving usage

Let’s expand on the last point of this list of options. Many small business credit cards do not report the cardholder’s personal credit reports until the debt is paid in a timely manner. A few never report personal credit.

However, most small business credit cards require a personal credit check and a personal guarantee. Here is a chart outlining how business credit cards relate to personal credit.

In case you were wondering, some credit rating companies also rate usage, but not all. Also, corporate credit reports generally do not include credit limits. Instead, a recent high balance is often used as an indicator.

This article was originally written on May 5, 2022.

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