Personal Finance Tip of the Week, By Financial Fundamentals, LLC of Watertown

​Are you aware of your credit card utilization rate? If not, you should begin to consider the direct and indirect benefits of tracking and managing your utilization rate over time.

How to calculate utilization

Your utilization rate is simply your balance divided by your credit limit. Say you have a $1,000 balance outstanding on your card and its credit limit is $2,000. Your utilization is 50% -- $1,000 divided by $2,000.

Your utilization rate across all your cards is relevant too. In this case it is the sum of your balances divided by the sum of your credit limits across all of your cards. Say you have 2 cards, each with a $2,000 credit limit. The balance is $1,000 on one of the cards and $0 on the other. Your utilization is 25% -- $1,000 divided by $4,000.

Direct benefits of managing your card utilization

The system that calculates your credit score, called FICO, uses both of these utilization calculations as risk factors. Your score will decline if your utilization is too high. I have observed that utilization rates of 10% or more begin to impact a score, and utilization rates of 50% or more have a significant impact.

If one of your financial goals is to improve your credit score, use utilization as a tool. Use your cards regularly but sparingly in order to keep your utilization below 10%. Positive credit activity will be reported to the three national credit bureaus, but utilization-based risk factors won’t be triggered. This will boost your score over time.

Indirect benefits of managing your card utilization

Low card utilization rates are often a reflection of other positive financial behaviors. For example, it generally indicates that you are living within your means and aren’t relying on cards to finance your lifestyle, So if you aren’t a fan of doing a lot of detailed tracking with your household finances, you could use card utilization (along with monthly contributions to savings, perhaps) as more general indicators that your finances are under control.

Low utilization rates may also mean that your balance is small enough to be paid off in full at the end of the month. By paying in full, you will never be charged any interest or financing fees. This could save you thousands over time, due to the high interest rates and fees on cards. The money you save could be directed to other important financial goals in your life and help you get ahead.

So the next time you get your card statement, think not only about the balance, but also the utilization, and drive both lower over time!

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Stephen Barkhuff, CFP(R), CFA is the founder and president of Financial Fundamentals, LLC, based in Watertown, MA. Financial Fundamentals helps couples and singles with modest incomes take control of their financial future. Please feel free to email him any questions or comments.