Closeup of hand using credit card swiping machine to pay. Female hand with credit card paying through terminal for payment in coffee shop. Woman entering debit card code in swipe machine. Concept: credit utilization
Betsy Wise
By: betsy_wise
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How Good Credit Utilization Can Benefit You

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Will Rogers, humorist, cowboy, vaudeville performer, and social commentator had opinions about everything. His comments sometimes made people uncomfortable but spurred them toward success. For instance, he shared his pointed belief as to why some people ruin their credit:

Too many people spend money they haven’t earned, to buy things they don’t want, to impress people that they don’t like.

Maybe that comment fails to describe you, but one thing is certain. Poor money management prevents many people from having good credit utilization and enjoying financial health. 

In this post, you’ll learn the importance of having good credit utilization and how to improve it. If you’re determined to improve your credit utilization, heed Rogers further advice:

The best way out of a difficulty is through it.

What is credit utilization?

Imagine having your smartphone, Bluetooth headphones, a Fitbit watch, and a computer tablet piled up in one big heap. To understand the meaning of credit utilization, these gadgets represent how many credit cards you have. Collectively all these items (credit cards) are worth $2,000 but you still owe $1,000 on two of the items that you bought with credit cards.

If you owe $1,000 on your credit cards (two of the items you purchased) and have a $2,000 credit limit (split among four credit cards), your credit utilization ratio is 50%. That means your credit utilization is high because you should keep the ratio below 30%.

Every time you pick up one of the gadgets (credit cards) from the pile, it’s a reminder that you overspent. Consequently, you realize that having inferior credit is unfavorable for you and your business. The solution is to improve your credit utilization and enjoy its benefits. 

Close-up Of A Businessperson's Hand Calculating Invoice At Workplace. Concept: credit utilization

8 benefits of having a good credit utilization

In addition to gaining access to loans, good credit utilization also provides these benefits: 

1. Increases your credit score

By keeping credit utilization under 30%, your credit score should rise. You aren’t considered as financially risky because you don’t max out your credit cards. If you use a low percentage of your overall credit limit, chances are you should be able to pay off your credit cards each month.

2. Qualifies you for credit limit increases

Good credit utilization indicates that you can manage money wisely. That means credit card issuers are more likely to increase the limits on your cards when asked.  You may be tempted to spend more because you have additional credit to spend, but don’t. You’ll jeopardize any progress you’ve made. 

Keep in mind, there’s one downside to increasing your credit limit. You may temporarily reduce your credit score when creditors make hard inquiries when you apply for credit.

3. Enables you to make larger purchases

As your credit limit increases and you continue to pay off your cards, you could use your credit cards to purchase inventory for your business or update computer software. The larger the investments you make in your company, the more chances it has to grow and achieve success.

4. Helps you get better deals

Many credit cards pay a cashback percentage of the purchase or offer a cash bonus after you’ve spent X amount of money. You can earn membership rewards points to offset travel expenses. Moreover, some cards offer extended warranties and coverage for stolen items.

Black credit card on dollar banknote. Concept: credit utilization

5. Reduces security deposits

Perhaps you need to rent a business space. One of the first things a landlord will probably do is check your credit history. They may require a smaller security deposit when you have a low credit utilization ratio and higher credit score.

6. Lowers your interest rate

People with the best credit get the best interest rates. That’s a fact. 

Lenders take into consideration your credit utilization ratio because it indicates whether you pay your bills on time. And who wouldn’t want lower interest rates in their credit cards and business loans?

7. Improves creditworthiness

Lenders immediately see you as trustworthy when you have good credit. It’s a normal assumption to make that works in your favor when you need more working capital for your business.

8. Helps you reach your business goals

Having a good cash flow ensures that you stay on track with your business’s financial goals. 

You simply can’t forge ahead without having access to funds. Good credit utilization guarantees that you have emergency funds to pay for an unexpected repair to your business equipment or pay for other temporary expenses.

How to improve your credit utilization

Sometimes Will Rogers said things people didn’t want to hear such as: 

Even though you are on the right track – you will get run over if you just sit there.” 

But hearing the cold, hard truth can help us become better.

In all fairness, you may simply not know what to do or lack the confidence to improve your credit utilization. No worries, we’re here to help. Here are simple steps you can follow to obtain good credit utilization.

  • Use your credit cards: It’s okay to charge items using your credit cards as long as you pay them off each month and avoid making minimum payments. And, of course, don’t forget to only use 30% of your available credit.

Do’s and don’ts when using a business credit card

  • Don’t close credit card accounts: Once you pay off an account, leave it open so you don’t reduce your total available credit limit.
  • Get help with debt: If you’re having trouble paying off unsecured credit cards, get a personal loan to consolidate credit card balances into one payment that has a lower interest rate. Use any extra money on hand to pay down debt.

Smiling young African businessman wearing glasses and reading text messages on a cellphone while sitting on stairs in an office. Concept: credit utilization

Camino Financial understands the importance of good credit utilization

Even though Camino Financial does work with applicants who have bad credit utilization, we help them improve their credit. We share educational resources and articles to help them grow their businesses and improve their credit.

If you want to have better credit, we recommend reading:

Woman checking her credit report on a paper copy and on computer screen. Concept:How to improve your credit score

How to Improve Your Credit Score

 

Furthermore, in Camino Financial we structure our microloans and small business loans with our motto, “No Business Left Behind,” in mind to ensure that we find the right business loan for your business. After filling out a short online application, you’ll know in a few seconds whether you qualify for a Camino Financial loan.

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