The Ultimate Guide to Calculating Credit Utilization and Improving Credit Scores

I wonder why no one tells us about this early enough- the fact that it’s a critical piece of your personal financial life and that you can hugely influence it!

A credit score of 690 vs 780 can have you on a completely different financial footing. And yet, it’s almost as if we need to tip-toe and guess what the powers that be judge our creditworthiness to be.

I mean, if you have ever tried getting a loan, you probably would be aware of this wonderful little number that could make or break your financial opportunities. 

Well, buckle up, because we’re about to dive deep into the world of credit scores. During my consulting days at PwC and Deloitte, I spent almost an impossible number of hours working and advising on credit risk.

Were they my favourite consulting days?

Credit is the cornerstone of the financial services industry and therefore personal and commercial finance. But if you are reading this, I think you are looking to improve your credit score rather than your company’s. So, let me demystify credit scores, show you how to calculate credit utilization, and provide actionable tips for boosting your credit score from a 690 to something even more impressive. Ready? Let’s roll!

Let’s start with the basics: What exactly is a credit score? 

It is essentially your financial report card, a three-digit number ranging from 300 to 850 that tells lenders how creditworthy you are. A higher score means you’re a lower risk, meaning you are likely to pay back the money you owe in good time- music to any lender’s ears. But a lower credit score can mean that you might not even be able to get another credit card or a car loan.

Your score is influenced by several factors, including your payment history, the amount of debt you owe, the length of your credit history, and the variety of credit you have.

1. Payment History (35%): This is the most significant factor in determining your credit score. Lenders want to know if you pay your bills on time. Late payments, defaults, or collections can significantly lower your score. During my time at Deloitte, I worked with clients to develop systems ensuring their customers paid on time and calculated interest rates that would be profitable for sub-prime lenders lending to customers with less than 650 credit score.

2. Credit Utilization (30%): This is the ratio of your credit card balances to your credit limits. High utilization indicates higher risk. Stay with me- I’ll explain how to calculate this in detail later.

3. Length of Credit History (15%): The longer your history, the better. Lenders like to see a long track record of responsible credit use. You don’t have much control over this if you are a newly minted graduate or have recently moved countries, but building your credit history up sooner rather than later is wise.

4. Credit Mix (10%): A variety of credit types (credit cards, mortgages, car loans) can positively impact your score. However, if all your credit is on a few scattered credit cards, this is a red flag for the credit agencies.

5. New Credit (10%): Each time you apply for new credit, it results in a hard inquiry on your report, which can slightly lower your score. Frequent applications can signal financial distress.
   
   

I promised to talk about credit utilisation because this is indeed one of those things you can control without doing very much. This little number packs a big punch, accounting for about 30% of your total score. Here’s the step-by-step of how to calculate:

1. Sum Up Your Credit Card Balances: That’s right, grab your statements and tally up the outstanding balances on all your cards.

2. Sum Up Your Credit Limits: Do the same for your credit limits. If you don’t know your limit, ring up your credit card providers and ask.

3. Divide the Total Balance by the Total Credit Limit: This gives you a decimal.

4. Multiply by 100 to Get a Percentage: Voilà! You’ve got your credit utilization rate.

For example, if you’ve got two cards with a total balance of $2,000 and a total limit of $10,000, your utilization rate is:

Keeping your utilization below 30% is the golden rule here. The lower, the better! I make it a habit to call my credit card provider every year to request an increase in my credit limit. It’s a simple call, but it’s a game-changer for keeping my credit utilization low.

Got a score of 690? That’s a solid start, but why stop there? Here are my top tips to elevate your score and unlock even better financial opportunities.

First and foremost, only take on debt you can comfortably repay. Financial responsibility starts with living within your means. It’s tempting to stretch, but overextending can lead to missed payments, and nothing tanks a credit score faster than that. During my time at Deloitte, I saw first-hand how retail customers like you or me would lose everything just because they never learned the importance of sustainable borrowing practices. It’s all about knowing your limits and sticking to them.

Living within your means isn’t just a financial principle—it’s a lifestyle. When you borrow more than you can afford, you set yourself up for a cycle of debt that’s hard to break. 

One of my key points of disagreement with Robert Kiyosaki is that the average person can be over-leveraging themselves trying to buy property or run a business. I don’t believe in spending the banks’ money to finance my life and then have a million dollars in debt for retirement!

If you are anything like me, you know that when life gets busy it’s easy to forget a due date. Direct debits are your best friend—automate those payments to avoid late fees and keep your credit score improving. Personally, automating my credit card payments through direct debits has been a lifesaver. It’s reduced the brainpower I waste on paying bills and ensures I never miss a payment.

Direct debits are particularly useful because they help maintain a consistent payment history, which is crucial for your credit score. This is one of the top strategies I talk about to anyone who will listen because of how much time, energy, and money this single habit saves!

Remember our calculation on credit utilisation? Aim to keep that number below 30%. Pay down your balances and, if possible, request credit limit increases. Just promise me you won’t go on a spending spree!

Here’s a little secret from my playbook: every year, I call my credit card provider and ask for a credit limit increase. This isn’t so I can spend more, but to improve my credit utilization rate. It’s a strategy I’ve used for years, and it works like a charm. Keeping my utilization low has been a key factor in maintaining a high credit score.

Your credit history length matters. Keep those old accounts open and in good standing. They are the wise elders of your credit profile. Closing old accounts can shorten your credit history and negatively impact your score.

I regularly hear of people closing down their old accounts, especially before they want a loan. In reality, this can harm your credit score because credit agencies get suspicious of what you might try to hide. Keeping those old accounts open and well-managed shows a long history of responsible credit use, which is a big plus in the eyes of lenders.

Avoid frequently opening new credit accounts or closing existing ones. Each time you apply for credit, it can result in a hard inquiry, which can temporarily lower your score. Stability is key. 

Let it grow steadily and consistently. Lenders like to see stability, as it suggests reliability and low risk.

Being on the electoral roll can improve your credit score as it makes it easier for credit agencies to verify your identity. It’s a simple step that can make a significant difference. And if you don’t want to vote, that’s okay! 

(Not really, but that’s not the point of this blog post!)

Register irrespective of your willingness to vote, even if you are living in your parent’s basement. The fact that your whereabouts are known is of massive importance.

Regularly review your credit report to ensure all information is accurate. Dispute any errors with the credit bureaus. Mistakes happen, and they can negatively impact your score if left uncorrected.

With one of my friends, I saw firsthand how errors on credit reports could devastate someone’s credit score. A friend had a case of mistaken identity where another person’s debt appeared on their report. It took time, but by diligently disputing the errors, they finally restored their credit score. Let this be a powerful reminder to check your report regularly.

Unfamiliar entries on your credit report could indicate fraud or identity theft. If you spot something suspicious, report it immediately to protect your credit score. As a data nerd, I am always emphasing the importance of vigilance against fraud—your credit score depends on it.

Now that you know what impacts your credit score, let’s talk about what does not impact your credit score! There are far too many myths in this space, and let me debunk them one at a time and provide some context.

Your income does not directly impact your credit score. While a higher income might make it easier to manage debt and avoid missed payments, it isn’t a factor that credit scoring models consider.

However, there’s one thing to consider here. Some lenders, before lending or increasing your credit limit will require you to submit proof of income. So while your credit score is not directly impacted by your income, your ability to borrow might depend on it. So, as I always tell my students, consider increasing your income consistently because this one big financial decision can impact the rest of your life.

Where you live has no bearing on your credit score. Whether you move frequently or stay put in one place, your address won’t impact your score. However, ensuring your address is up-to-date with your lenders is important to confirm identity and for receiving statements and other communications.

Whether you’re single, married, or in a relationship, your credit score remains unaffected. Relationship status isn’t a factor in credit scoring models. However, if you have taken out a joint credit card or mortgage, your credit score will likely be related to the other person’s.

Similarly, your employment status doesn’t directly impact your credit score. However, being unemployed might indirectly affect your ability to pay bills on time, which can impact your score. But the score itself doesn’t account for whether you’re employed, unemployed, or self-employed.

Here’s the deal though- I have heard several self-employed people not getting loans, not because they can’t repay their loans but because their incomes are considered more variable than a steady monthly salary. 

Credit scores are designed to be impartial to your race or ethnicity. They are calculated based on financial behavior and credit history, not personal demographics. So if you find yourself a victim of this using your credit report, please flag it immediately. This is unethical and outright discriminatory.

Your religious beliefs or affiliations like your race or ethnicity have no bearing on your credit score. Credit scoring models do not consider any personal beliefs or affiliations.

Gambling itself doesn’t affect your credit score. However, if gambling leads to financial problems and missed payments, your credit score could suffer. As with any activity that impacts your ability to manage debt, it’s the financial consequences that matter, not the activity itself. Recreational gambling can be an expensive, and sometimes life devastating hobby, which is better to keep away from.

There you have it, folks! Understanding and managing your credit score doesn’t have to be a chore. With these tips, you’re well on your way to turning that 690 into a number that makes lenders chase you and not the other way around.

Remember, maintaining a good credit score is a marathon, not a sprint. Consistent, responsible financial habits will keep you ahead of the game.

Whether you are a multinational corporation or an individual, the principles are the same: be responsible, be proactive, and be vigilant.

Happy credit building! And if you’ve got any personal tips or stories, feel free to share them in the comments. Let’s learn and grow together!