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WalletPrep worksheet · Credit

What is credit utilization and how do you lower it?

Name ____________________ Date __________

Key ideas

  1. Utilization is balances divided by limits. Jordan owes $1,200 on $6,000 of limits. $1,200 ÷ $6,000 = 20% overall.
  2. Each card is counted on its own too. Jordan's Card A shows $900 on a $1,000 limit, which is 90%, even though his overall figure is only 20%.
  3. The statement balance is usually what gets reported. Pay before the statement closes and a lower balance gets reported. Paying on the due date only avoids interest.

Vocabulary

Credit utilization
How much of your available credit card limit you are using, shown as a percentage. Lower utilization usually helps your score.
Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Credit bureau
A company that collects your credit history and sells reports to lenders. The three nationwide bureaus are Equifax, Experian and TransUnion.
Soft inquiry
A credit check that does not affect your score, like checking your own credit or a lender sending you a preapproved offer.
Hard inquiry
A credit check made when you apply for credit, like a card, loan or mortgage. It can lower your score a few points for a while.
Annual fee
A yearly charge some credit cards add to your bill just for having the card, whether you use it or not.

Work it out

Jordan has three cards with $6,000 in total limits. Card A has a $1,000 limit and a $900 balance. He pays in full every month, but always on the due date.

  1. Card A balance
  2. Card C balance (Card B is $0)
  3. Total balances
  4. Overall utilization ($6,000 limits)
  5. Card A utilization
  6. Paid on Card A before it closes
  7. Balances reported
  8. New overall utilization
  9. New Card A utilization

Check yourself

  1. You owe $500 on a $2,000 limit and $0 on a $3,000 limit. What is your overall utilization?

    • A. 10%
    • B. 25%
    • C. 17%
    • D. 50%

  2. Which balance is usually reported to the credit bureaus?

    • A. Your balance on the due date
    • B. Your highest balance that month
    • C. Your statement balance
    • D. Your lowest balance that month

  3. What usually happens to utilization when you close a no-fee card with a $0 balance?

    • A. It goes down
    • B. It stays the same
    • C. It goes up

Your turn

Open each card's latest statement and write down the closing date, balance and limit. Divide each balance by its limit, then set a calendar reminder to pay 3 days before the next closing date.

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Answer key

What is credit utilization and how do you lower it?

Work it out

  1. Card A balance$900
  2. Card C balance (Card B is $0)$300
  3. Total balances= $1,200
  4. Overall utilization ($6,000 limits)20%
  5. Card A utilization90%
  6. Paid on Card A before it closes− $600
  7. Balances reported= $600
  8. New overall utilization10%
  9. New Card A utilization30%
  1. Before: $1,200 ÷ $6,000 = 20% overall, but Card A is at $900 ÷ $1,000 = 90%.
  2. Jordan pays $600 on Card A three days before its statement closes. Its balance drops to $900 − $600 = $300.
  3. Now $600 ÷ $6,000 = 10% overall, and Card A shows $300 ÷ $1,000 = 30%. He spent the same and paid no interest either way.

Check yourself

  1. A. 10% $500 ÷ ($2,000 + $3,000) = $500 ÷ $5,000 = 10%. The first card alone is at 25%.
  2. C. Your statement balance Most issuers report the balance shown on your statement, around the statement closing date.
  3. C. It goes up The card's limit leaves your total, so the same balances are divided by smaller limits.