Credit utilization, or the amount of credit you are using compared to your credit limits, is an important factor in your credit score. A high credit utilization ratio, or the percentage of your credit limits that you are using, can hurt your credit score and make it more difficult to get approved for loans and credit cards. Here's what you need to know about credit utilization and how it impacts your credit score:

1. Credit utilization is calculated based on your credit card balances and credit limits

Credit utilization is calculated by dividing your credit card balances by your credit limits. For example, if you have a credit card with a $1,000 credit limit and a balance of $500, your credit utilization ratio would be 50%. Credit utilization ratios are calculated separately for each credit card and then averaged across all of your credit cards to get your overall credit utilization ratio.

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2. A high credit utilization ratio can hurt your credit score

A high credit utilization ratio can hurt your credit score because it suggests that you are relying heavily on credit and may be at a higher risk of defaulting on your debts. To maintain a good credit score, aim to keep your credit utilization ratio below 30%. This means keeping your credit card balances low and paying off your debts as quickly as possible.

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3. You can improve your credit utilization ratio by paying off your debts and increasing your credit limits

There are a few ways you can improve your credit utilization ratio and boost your credit score. One way is to pay off your debts as quickly as possible, which will lower your credit card balances and improve your credit utilization ratio. Another way is to increase your credit limits, which will increase the denominator in the credit utilization ratio calculation and lower your overall ratio. You can request a credit limit increase from your credit card issuer, but keep in mind that this may generate a hard inquiry on your credit report, which can temporarily lower your credit score.

Credit utilization is just one factor that impacts your credit score, but it's an important one to consider. By paying off your debts and keeping your credit card balances low, you can improve your credit utilization ratio and boost your credit score. If you are having trouble improving your credit score on your own or have a lot of negative information on your credit report, you may want to consider working with a credit repair service, like Credit Bounce, a free credit repair service that can help you identify and fix errors on your credit report and improve your credit score.