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Credit Utilization And It's Impact On Kitchener Car Loans

Credit Utilization And It's Impact On Kitchener Car Loans

Auto loan applications use credit scores to decide whether to lend and at what rate. Your score is partly made up of credit utilization so it’s a useful thing to know if you’re planning on buying a new car anytime soon.


We asked our Kitchener auto loans team to outline the basics of credit utilization, how to check, what it means and what to do about it.


What is credit utilization?


For once, the name is quite descriptive. Credit utilization is the amount of available credit you’re using. It mainly refers to ‘revolving credit’ that is, credit cards.


For example, if you have a credit card with $5,000 credit limit and are using $500, that’s 10% utilization. You’re using 10% of your available credit.


If you have multiple credit cards, you add up the total credit limit and the total balance to make the same calculation.


How does credit utilization impact your credit score?


Your credit score is made up of a series of elements including your payment history, your credit mix (different types of lending) and credit utilization.


Credit utilization can make up to 30% of your credit score, which is why it’s so important and why our Kitchener auto loan team think it’s worth learning a little about.


A low credit utilization ratio means you’re not using much of your revolving credit, which is a good thing. This will benefit your credit score.


A higher credit utilization ratio means you’re using more of your credit, which isn’t such a good thing. This can reduce your credit score.


The magic number seems to be between 30-35%. Use more than that and lenders will look carefully at any auto loan application. It can also negatively impact your credit score.


Even though you may be easily afford repayments on higher ratios, credit bureaus have decided that this 30-35% figure is an ideal, so will judge everyone on it.


Exceed that ratio and your credit score will be impacted. Stay under that and you’ll be fine.


How to lower your credit utilization ratio


If you’re planning for an auto loan in Kitchener and want to reduce your utilization ratio, you have options.


You could:


Pay down credit cards – Pay off your credit cards to reduce what you owe. Remember that payments will take up to 30 days to be visible on your credit report due to reporting periods.


Increase your credit limits – You could request an increase in your credit limit. This will expand your available revolving credit and reduce your ratio. Just don’t use it!


Keep open cards you don’t use – If you have credit cards you don’t use, keep them open as their credit limits will contribute to your credit utilization ratio.


You could also open a new credit card but this would temporarily reduce your credit score as the card issuer would make a hard inquiry. Time it well and it would recover in time for the auto loan.


Time it badly and you may be charged a higher rate for your auto loan.


When you’re ready for a car lease or loan, get in touch with the Kitchener auto loan experts at Northway Ford for great deals on auto finance.


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