There is a magic word in credit called “utilization”. Utilization is simply the amount of credit you are using compared to the credit limits you have.
So if you have a credit card with a limit of $2500 and you’re using $1250, then your utilization is 50 percent, and that’s not good. If you have a high utilization, that sends a signal to lenders that you spend without regard for the need to repay.
Make sure you keep your credit balance below 35 percent, and if possible, between 35 and 25 percent.
Now let’s say you have three credit cards. Your combined limit is $10,000, and you have $2500 in credit balances between the cards. Great, you’re at 25 percent! But wait! You can’t have one card at 5 percent another at 10 percent and another at 90 percent. Each card should have a utilization around 25 percent.
It’s important to understand that the size of the limit does not matter. If you have a credit card with a $100 limit, you shouldn’t use more than $25 each month.
What if you find yourself in an emergency situation and you need to use more than 25 percent of your limit? You can use 100 percent of your limit, but you should then pay that balance until you get to 25 percent before the end of that billing cycle. For example, you can use your card with a $2500 limit to pay for that unexpected doctors bill. But before the billing cycle ends (we’ll say for this card the 28th of the month), you need to pay the balance down to $625 or 25 percent of your limit.
Keeping you utilization of available funds close to 25 percent will send lenders the signal that you are a wise consumer who knows how to manage your finances.