Credit utilization goes hand in hand with the concept of a credit line or a credit limit. If you're interested in an even deeper dive, see our article here.
- Credit line: a borrowing limit that you can use at any time.
- Credit limit: The maximum amount of credit you can use.
- Credit utilization: The amount of your credit line that you're using.
When you get a, the credit card company gives you a line of credit, or a credit limit. This number is the maximum amount that you can spend on the card without paying the card company back. Some people think that you can only spend as much your credit limit every month. But the truth is, you can spend as much as you want - the credit card company just won’t lend you more than your credit limit without you paying it back. It’s important to know that you can pay off your credit card whenever you want as a way of freeing up more of your credit line.
Your credit utilization rate is dictated by how much money you have on your bill when it closes and how much your total credit line is. In fact, it's an exact calculation of [the total amount outstanding on your account]÷[your total credit line]. That’s why a lot of times you might hear advice that you should only use your credit card for a couple purchases every month. But because you can pay off your credit card as often as you want, you don't actually have to limit yourself to a few purchases a month on your credit card. This is exactly what Fizz does - your balance is paid off on a daily basis, keeping you out of debt and keeping your credit utilization low.
What's the point?
If credit utilization is so easily manipulated, why is it important when it comes to your credit score? There's a simple reason why credit utilization is a relevant metric for credit bureaus and potential lenders. If you’re someone that carries a balance on your cards (which means you don’t pay them back in full every month - avoid carrying a balance at all costs), you’re going to have to pay interest on the balance that you don’t pay back. In other words, you’ll have to pay more than what you borrowed in exchange for not paying it back right away.
Someone who truly isn’t capable of paying back their balance in full every month will gradually see their total balance grow overtime as it builds up interest. Therefore, somebody with a consistently high credit utilization rate might be someone that’s consistently carrying a balance on their cards. You should avoid this at all costs because of how high interest rates are with traditional credit cards.
Credit utilization has a pretty simple definition. How much money do you have on your credit card bill when it closes? Finding the exact number is easy - you just divide how much you have on your bill by your total credit line.
I know credit utilization seems like a game. But if you’re not carrying a balance on your cards, you don’t have much to worry about. It’s easy to make sure that your utilization rate stays low by using the simple trick of paying your balance right before your statement closes or making regular payments throughout the month. Still worried! Use your Fizz card and you won't have much to worry about at all!