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Understanding Credit Card Balances and Utilization Rates

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding your credit card balances and utilization rates. For any mortgage-related needs, feel free to call us at 213-732-3074.

What Is a Credit Card Balance?

Your credit card balance can refer to either your card’s current balance or its statement balance:

• Current balance: This is the most recent balance you see when you log in to your account or check your balance on a mobile app. It includes the most recent statement balance plus any additional transactions, such as purchases, payments, and fees.
• Statement balance: This is the balance that appears on your card’s most recent statement. It represents a snapshot of your card’s balance at the end of a billing cycle and determines your monthly minimum payment.

The due date for your credit card bill is typically about three weeks after a statement is created. If you pay your statement balance in full, you can avoid accruing interest on your purchases. However, if you pay less than the full amount, the remaining balance and any new purchases will accrue interest.

What Is a Credit Utilization Rate?

A credit card’s credit utilization rate is the percentage of the card’s credit limit that you’re using. For example, if you have a $1,000 balance on a card with a $5,000 limit, your utilization rate is 20%. To calculate this, divide the balance by the credit limit and multiply by 100 to get a percentage.

Credit scoring models use this ratio as a factor in determining your credit score. Generally, a lower utilization rate is better for your scores. Credit card companies report your account information to the credit bureaus around the end of each billing cycle, which is why your statement balance typically better reflects your credit utilization than your current balance.

Why Your Credit Card Balance and Utilization Are Important

Your card’s balance and utilization are crucial because they represent what you owe and can significantly impact your credit score:

• If you’re carrying a balance: Paying down the balance can reduce the interest you accrue and potentially increase your credit score as your balance drops.
• If you pay your balance in full each month: You won’t accrue interest on your purchases, but your statement balance is still reported to the credit bureaus. To lower your statement balance and utilization rate, consider paying down the balance before the end of the billing cycle.

A lower statement balance is better for your credit scores. You might consider paying off the balance in full every few weeks or even more frequently. The best utilization rate is in the low single digits, such as 1%, showing that you manage your card well without overextending yourself.

Monitor Your Balances and Utilization

Monitoring your credit card balances throughout the month can help you understand what will be reported to the bureaus. To optimize your utilization rate and improve your credit score, consider setting up automatic payments or reminders to pay down your balance before the end of each billing cycle.

Additionally, you can check your credit cards’ current utilization rates by reviewing your credit report. Your account will show your overall utilization rate based on the balances and limits of all your revolving credit accounts, which is also an important scoring factor. You can get tips for improving your score and track your score over time.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make informed financial decisions.

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