This week’s newsletter contains a secret about credit cards😉, a newsworthy story about i bonds👀 and Taylor’s tool for easy cooking (that saves time + money) 🤩 Read more to get the priceless tea!
🤫Let’s fill you in on the secret
What is credit utilization?
Credit utilization is the amount of credit you have used compared to the total amount available to you. It’s calculated by dividing your balance by your total credit limit on all of your credit cards. For example, if you have $5,000 in available credit and a $1,000 balance on one card, then your credit utilization would be 20 percent ($1,000 divided by $5,000). Credit scores take into account how much money is owed on each card compared with its overall limit.
A lower ratio is better because it means that you’re using less than half of what’s available to pay off loans and charge purchases — which shows lenders that there’s little risk involved in lending more money to someone with good payment history who has already proven responsible with their current debts. That translates into better terms for new loans and cards as well as lower interest rates for existing accounts since lenders know they won’t be left holding the bag if you default on payments (that’s when they lose money).
How to calculate your credit utilization ratio
To calculate your credit utilization ratio, divide the amount of money you owe on your credit cards by the total amount of credit available. The resulting number is expressed as a percentage. You can use this figure to determine whether or not it’s time to intervene with your spending habits and pay down debt.
- Divide your outstanding balances by the sum of all of your available lines of credit:
- If you have $5,000 in total debt and $20,000 in available credit, divide $5,000 by $20,000 to get 25 percent. This means that 25 percent of all lines of credit are being used with this balance level and 75 percent aren’t being touched at all.
- If you have $5,000 in total debt but only one line open for $10K (10K), then 10 thousand divided by 15 thousand is 66%. So 66% or 2/3rds (or two thirds) are being utilized when compared against 100% (all lines).
Credit utilization ratio vs. total credit usage
Credit utilization ratio is the percentage of your total credit that you are using. Total credit usage is the amount of debt you have. Credit utilization ratio is a better indicator of your credit health than total credit usage because it takes into account how much higher or lower your balances are compared to the limit on each card. The higher this percentage, the more likely it will negatively impact your score.
Credit scoring models look at other factors too, but they’re less important than this one—even if everything else in your report were perfect (which we’ll see later isn’t realistic), a high utilization would still bring down your score by hundreds of points!
Positive effects of low credit utilization
With a lower credit utilization, you’ll be able to get better interest rates on your loans.
When you have high utilization, it can affect your credit score. A higher score makes it easier to borrow money for things like buying a car or home and being approved for loans or credit cards with lower interest rates.
Drawbacks of high credit utilization
There are a few drawbacks to high credit utilization. The first is that it can hurt your credit score, which is important when applying for loans and other forms of debt. Your credit score represents a snapshot of how well you’ve managed your finances, so it’s an important metric to have in mind when managing your spending habits. The higher your balance-to-credit ratio (or utilization), the more likely you are to end up with poor credit scores.
The second drawback is that if you’re considering applying for new lines of credit, high utilization might disqualify you from being approved for those new accounts or lower their limits significantly — making them less useful in the long run!
Keep your credit card balance low for healthy credit.
Credit utilization is the ratio of your credit card balance to your total credit limit. Credit scoring companies like FICO score this number based on its influence on a borrower’s ability to repay credit obligations. If you have a $1,000 credit limit and a $500 balance, then your utilization is 50%.
This means that if you want to keep your credit score healthy for as long as possible, it’s important to keep that balance below 30%. You may not think this matters much—after all, if you pay off the entire amount each month and only use one card, then why would it be an issue? The problem arises when there are cash flow issues or emergencies: suddenly racking up debt can affect your utilization rate without even realizing it. It could also impact how responsible lenders consider you over time; they might decide not to extend additional lines of credit because they’re worried about how much financial stress you’re experiencing right now (even if it’s simply temporary).
📰 In the news
If you’ve ever been curious about I bonds, you should know that they are a safe and reliable investment. They are also backed by the U.S. Treasury, just like savings bonds. But unlike savings bonds, I bonds don’t ask you to lock your money up for 30 years or more. You can redeem them after one year and pay taxes on their interest or let them earn interest tax-free for up to 30 years and then redeem them without penalty.
But you have to act fast for this interest rate!
To get the current rate you have to buy by October 28th but don’t fret if you don’t buy them in time, the yields are only expected to drop 6.47% which is still much better than a savings account!
🧰 This Week in Taylor’s Toolkit
I’ve been LOVING my crock pot! For those who work as much as I do this is a kitchen essential! I was ordering a TON of takeout and delivery, but with my crockpot, I can find a recipe on Pinterest, get groceries on Sundays for the week, and throw it into the crock pot! It is an easy way to meal prep as leftovers can usually be frozen as well!
The most recent recipe I made was this garlic, honey slow cooker chicken from scrolling on Pinterest. Alongside the chicken, I made roasted broccoli and butternut squash with some rice. I had some friends come over for Game of Thrones and we shared this delicious meal – even having some leftovers for a few days after!
❓ Ask the Expert
This a new section on the newsletter where you can ask me anything about finance, money, buying a house, personal finance tips, etc and I’ll be sure to help you out!
Since we recently set up this form, I’ll answer a question from an Instagram Story recently. Alexis asks,
“I’m always spending money, I don’t see how I can I better manage my money?”
Alexis, this is a great question that many other people ask too! It’s easy to think that you’re constantly spending money when you don’t know where the money goes, or when you have a hard time prioritizing between wants and needs. Because we manage our money so poorly, we usually see it in larger chunks—when we look at our bank statements and credit card bills, we’re confronted with totals that are too large to understand.
The best way to approach this in my opinion is to get acquainted with your expenses by tracking every dollar as it comes and goes. You’ll feel more in control of your finances and better able to prioritize if you know how much you’re spending on everything from rent to takeout. It’s also a great way to find out where your money is going so you can make changes for the better. If you track your expenses for a month, you’ll have a record of what you spend every day, which will help you become aware of your everyday spending habits and give you the opportunity to evaluate them. Some people might find that they’re spending too much on food or going out, for instance, but are clueless about how much they really spend on these things until they start tracking their expenses. Tracking your spending gives you the opportunity to make changes that will save money in the long run.
Your finance friend,
Ask your question here!
📎Links we love!
- Crock pot here! https://amzn.to/3TsB7w7
- In stock market news! https://tinyurl.com/mr7u6yr9
- My latest video! https://www.tiktok.com/t/ZTRHqcNPH/https://www.tiktok.com/t/ZTRHqcNPH/