What is Credit Utilization?

One of the least understood factors affecting your credit score is credit utilization. It’s an important factor making up 30% of the credit score. So, what is credit utilization?

While credit utilization may sound confusing, it’s relatively easy to understand. It’s the percentage of the debt you carry based on your credit limits. If your credit balance is high or close to the limit, it will lead lenders to believe that too much of your monthly income is going toward debt payments.

Debt-to-Credit Utilization Ratio

It’s often expressed as a ratio called the debt-to-credit utilization ratio. The ratio measures your credit usage against your available credit. Also known as revolving credit, it’s your credit card usage and how much of your open credit lines you are using.

Your credit utilization ratio is the sum of all your credit card balances divided by the sum of your card limits. For example, if your card balance is $400 and your total available credit is $1,000, you have a 40% credit utilization ratio.

There is no perfect utilization percentage, but the lower the ratio, the better. A ratio of 20% is better than 30%. Paying your card bills in full each month is the best way to keep a low credit utilization ratio.

Generally, a credit utilization ratio of 30% or less is acceptable. Improving this part of your credit score can require some strategic thinking. But, again, at 30% of the credit score calculation, well worth the effort.

Controlling your Credit Utilization Ratio

One way to lower your usage ratio is to increase your credit limit. For example, if your balance on a credit card is $400 on a credit card with a $1,000 limit, your ratio is 40 percent. However, a credit limit of $1500 with a balance of $400 makes the ratio 26.7 percent, which is much better. The lower your card balance, the lower your ratio—and the higher your credit rating.

Keep in mind that, since all your cards are factored into your credit utilization ratio, even the ones you don’t use can help your ratio and score. Additionally, if you pay off a credit card, keep that account open, so the available credit line raises the ratio in your favor. Further, asking for credit limit increases can better your usage percentage.

Why Does Credit Utilization Matter?

Why is this important? Generally, the lower the amount of outstanding debt, the higher the credit score, and vice versa. Remember, credit utilization is 30% of your credit score. If your credit burden is high, lenders will think that much of your monthly income is going toward debt repayments. Consumers who constantly reach or exceed their credit limit are seen as potentially risky.

Credit reporting agencies pay attention to your credit utilization ratio because it indicates how well you have your payments in order. A low utilization ratio suggests that your balance is manageable. A high one means you may have difficulty paying your debts.

Final Thoughts on Credit Usage

An open account with a zero balance can positively affect your credit utilization ratio. There can also be a negative effect on your credit score if you close an account.

So, the bottom line is to keep an eye on your credit utilization ratio. A low one is good for your credit score, and a high one is not so much. Comment below. I would love to hear from you.


Point Of Sale Installment Loans: What’s the Deal with Buy Now, Pay Later, and Your Money

You make a purchase at your favorite retailer, maybe online, and opt for the buy now pay later option at checkout. Do you know what you just did? Also known as point-of-sale installment loans, many have grown fond of “buy now, pay later” services. 

If approved, which takes seconds, you make a down payment of the overall purchase amount. Then you pay the remaining due in a series of interest-free installments. You can make payments via check, bank transfer, debit card, or credit card automatically.

Increased Popularity of Buy Now, Pay Later

Point-of-sale loans gained popularity by positioning as a trendier credit-card alternative for millennials with few strings attached. The loose credit rules helped attract users. Buy now, pay later loans have increased from $2B in 2019 to $24B last year. They gained traction, with consumers seeking the flexibility of paying for goods and services over time but maybe untrusting of other credit and loan products.

According to a 2021 study by the Strawhecker Group, 39% of Americans say they’ve tried buy now, pay later at least once. 

The quick growth of buy now, pay later is driven primarily by younger consumers, with two-thirds of borrowers considered subprime. Nearly half of generation Z shoppers and 70% of millennials are more likely to make a purchase if they can buy now, pay later. The thinking behind buy now, pay later is consumers can get the things they want and need immediately while also getting extra time to pay for them.

Buy now, pay later can be an appealing way to pay for smaller purchases when shopping online. Its popularity grew during the rise of e-commerce in general.

What’s the Deal with Buy Now Pay Later?

Point of sale or buy now, pay loans are essentially an interest-free loan that gives consumers the flexibility to pay for goods and services over time. Often buy now, pay later does not charge fees, but they have a fixed payment schedule comparable to any similar type of unsecured personal or consumer loan. A point-of-sale loan will allow you to sport that $400 Kate Spade handbag and pay for it later in monthly installments. Buy now, pay later encourages consumers to purchase and borrow more. As a result, borrowers can quickly end up taking out several loans within a short timeframe at multiple lenders. 

Point-of-sale loans are not new. Banks have been offering them subtly at furniture stores and orthodontists’ offices for years. However, this type of lending has become increasingly popular in recent years as technology has improved.

Your Credit and Point of Sale Loans

As buy now, pay later has become more popular, users have become more prone to overspending and missing payments. Although consumers are choosing buy now, pay later loans as a competitive alternative to high-interest credit products, it does not help you establish and build good credit, and you miss out on any perks.

Buy now, pay later financing offered through credit card companies may carry lower fees or interest rates than the regular variable APR charged on outstanding balances. Typically, buy now, pay later doesn’t affect your credit score; however, late payments or failing to pay can damage your credit score. Some buy now pay later companies only require a soft credit check for approval, which doesn’t affect your credit score. Others may conduct a hard inquiry of your credit, knocking a few points off your score.

Point-of-sale loans are different than a purchase with a credit card because when you use a credit card you are only required to make the minimum payment due on the card each month. Interest accrues on the remaining amount until you pay it off unless your card has a 0 introductory APR.

Point of Sale Regulation

The Consumer Financial Protection Bureau CFPB), Last week CFPB outlined plans to regulate the buy now, pay later business. Regulators believe that buy now, pay later poses risks to consumers because they lack protections. They also and encourage over-borrowing and loan stacking or getting approval for multiple loans or lines of credit simultaneously within a short period. Loan stacking generally happens online and can be done by either individuals or businesses.

Regulators plan to regulate buy now, pay later like credit card companies. That means the buy now, pay later industry may have to add pricey safeguards and do more credit checks.

Be More Aware of Buy Now, Pay Later

There are some things that I want you to be aware of with buy now, pay later.

First, be aware of the repayment terms. Some loans may require you to pay the remaining balance with biweekly payments. And others may give you three or six months or longer to pay. Knowing how your payments will help you when creating your spending plan. Also, this will ensure that you can afford your payments and make them on time. A missing or late payment could result in late fees and be reported to the credit bureaus, which could hurt your credit score.

Inflation is causing people to increasingly struggle to pay for necessities up front and fail to repay their loans. During the pandemic, shoppers used buy now, pay later to buy luxuries. Now, 15% of buy now, pay later users are using buy now, pay later to pay for gas and groceries.

Also, remember that though you may be approved for a 0-interest point-of-sale loan, it’s not guaranteed. Point-of-sale loan companies can charge interest on purchases that can easily match or outpace what you might spend on a credit card. And unlike credit cards, you are not earning any rewards on purchases.

Finally, consider return policies and point-pf-sale loans may affect your ability to return something you purchased. The merchant may allow you to make the return, but you may not be able to cancel the point-of-sale arrangement until you provide proof that the return has been accepted and processed. 

There you have it, the ins and outs of point-of-sale loans. Be sure to weigh the advantages of point-of-sale installment loans against the benefits of using other financing options. And remember cash still works. What has been your experience with buy now, pay later or pint-of-sale loans? Comment below, I would love to hear from you.  

How Healthy is Your Financial Behavior?

For example, daily coffee at $4.00 a day at 5 days a week, 52 weeks a year is $1040.   Suppose you save that money, what could you do with $1040?  A mini emergency fund perhaps.  

Financial behavior is the human behavior that is relevant to money management. It is how you manage money and can be healthy or unhealthy.  

If you do not have one, creating a spending plan or budget is good financial behavior that can lead to better financial management. 

The unhealthy can help us lose track of our spending plan. Avoiding unhealthy financial behaviors can reduce financial stress and help you to win with your finances.   Below are some unhealthy financial behaviors to avoid: 

Carrying a balance on a credit card.  Carrying a balance on a credit card is unhealthy financial behavior.  A balance on your credit card can cost you significantly in interest payments, as well as affect your credit score. 

I know this blog is about your spending plan and not credit, per se, and a little off-topic.  However, credit is nonetheless important in the family finance discussion.  We may talk about credit more in the coming months.   

Thirty percent of your credit score is based on the balances you carry, so it is important to pay the balance down by either paying it in full or paying more than the minimum due each month. 

Additionally, this will minimize the expense of using credit. 

If you are paying your balance in full each month, focus on making sure you’re not missing out on all the benefits your card offers. 

If your credit card company charges annual fees, make sure the benefits (rewards points, cashback options, gas rewards, or frequent flier miles, for example) outweigh the cost of those annual fees for you. 

Bankrate.com is one site that offers comparison for credit cards based on rewards, fees, interest rates, balance transfers, cash back rewards, and many other features or terms.

Purchasing single-serve items.  Are you in the habit of purchasing a daily coffee from the coffee shop or snacks and soda from a vending machine?  It does not seem like much but over time these small expenses can add up. 

For example, daily coffee at $4.00 a day at 5 days a week, 52 weeks a year is $1040.   Suppose you save that money, what could you do with $1040?  A mini emergency fund perhaps.  

As you can see, it may be more cost-effective to purchase items in bulk and then make your coffee at home.  Do the same with soda or snacks.  What other ideas or tips do you have for a grocery spending plan? 

Do nothing.  After reading these tips take some action.  Brainstorm ideas set some goals and apply what you’ve read.  Hopefully, you’re ready to apply some of these tips to your situation.  Maybe you still have questions or would like to research more financial tips. 

Maybe you feel like you need to speak with a financial coach or counselor. 

What is important is that you understand that you can improve your financial health and start taking steps in that direction.  The sooner you take action to improve your financial health the better.

Are some of your financial behaviors unhealthy?  Take a serious look at them and determine if they are.  The first step in solving a problem is finding the problem.  These are just a few tips.  Can you think more?