For those hoping to improve their credit score to perhaps improve the interest rates offered to them on car loans or mortgages, utilization rate is one of the most important factors that a consumer can understand. FICO (the company behind the main credit score model) doesn't reveal their exact formula, but they do say that "utilization rate" makes up a significant chunk of a user's score.
The idea is pretty simple – check how much of your available credit that you're using. Let's say you have two credit cards, with limits of $5,000 each, and you've charged $1,000 on both of them. You're using $2,000 of a possible $10,000 in credit – or 20 percent. That's right about where you want to be. If your rate gets too much higher, your credit score can suffer.
With this in mind, there are a few things you should look out for. First of all, be sure your credit card company is reporting your limit. Companies that don't report the limits of their cards can throw a wrench into the formula – and this includes "no limit" cards as well.
Second, be careful about closing cards. It can be a great feeling to pay off a card and close it for good, but be sure you're not killing your rate. In the above example, if you used a balance transfer to put $2,000 on one card and closed the other, then you just doubled your utilization rate to 40 percent. Even if you don't plan on using a card, keeping it open to up your limit is a smart play.