Why Your Credit Utilization Ratio May Be Higher Than You'd Expect

Don't put your credit score at risk by not understanding how you end up with a high credit utilization ratio.

Your credit score has a huge impact on your finances. It determines if you can borrow, which lenders will give you loans, how much you'll pay to borrow, and whether people -- such as landlords -- will want to do business with you. Since your credit score matters a lot, you need to know the factors that affect it and make smart choices about earning the best score you can.

While your history of paying bills on time is the most important criteria used to determine your score, your credit utilization ratio is a close second. Your credit utilization ratio is the amount of your available credit that you've used at any given time. So, for example, it would be 20% if you had a total of $10,000 in credit available but had charged only $2,000 on your cards.

Credit utilization ratio is determined based on what your creditors report to the credit bureaus each month. If you pay off your card in full, then you may assume yours would be 0%. But that's not necessarily the case, and, in fact, your utilization may be much higher than you realize. Here's why.

Here's why your credit utilization ratio may be surprisingly high

Paying off your credit card in full -- or paying your credit card balance down dramatically -- doesn't necessarily guarantee that you will have a low credit utilization ratio for one simple reason.

Creditors report the amount of credit that you have used at a specific time during the month. And if that time occurs before you've made your credit card payment, then the balance that your issuer reports may be higher than you anticipated.

Say, for example, that you charge $9,000 over the course of each month on your credit card with a $10,000 credit limit. You pay your balance in full when it's due on the 20th of the month, but the credit card company reports your balance on the 15th of the month. As a result, your credit report would show a $9,000 balance -- even though you ultimately paid the card off just a few days later.

Here's why this could be a problem

Unfortunately, if your credit card company is reporting your balance before you pay it down, your credit utilization ratio could appear very high when your credit score is calculated. And lenders could see a high credit balance when pulling your credit report.

This could affect your ability to borrow and could prevent you from getting the best rates. A lower credit utilization ratio will help you earn a high credit score, while using more than 30% of your available credit could cause your score to drop.

The best way to make sure this doesn't happen is to find out when your credit card company reports your balance and pay your bill before that happens. Sometimes, credit card companies will tell you this outright if you ask. Or you can check the balance reported and deduce the date from that.

It's worth paying attention to the amount reported on your credit report so you can make sure you aren't inadvertently hurting your credit score based on the day you happen to pay your credit card bill.