Everything to Know About Credit Utilization

When it comes to your credit score, credit utilization often plays a critical role. Understanding how credit utilization works and how to bring it down can help you out in a number of ways.

Having a solid grip on your credit utilization can mean building better credit, making financially smarter choices, and qualifying for higher credit limits in the future.

Here’s what to know.

What Is Credit Utilization?

Credit utilization measures the available credit you’re using on your credit cards. A credit utilization ratio includes the balances you owe on your credit cards relative to each card’s credit limit. This applies to everyone.

For instance, if you’ve never used your credit cards and you have no balance on them, your credit utilization would equal zero. If you are using one or a few of your credit cards frugally, you are “utilizing” the available credit to some extent. If you find yourself overspending, you likely have a high credit utilization ratio. And creditors are definitely watching how you’re using those cards.

These days, FICO and Vantage are two of the top credit scoring agencies. Both list credit utilization as the second highest factor used to determine someone’s credit score. So having a good credit utilization ratio is one major key to maintaining good credit.

What Is the Best Credit Utilization Ratio?

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Per WalletHub, “the best credit utilization ratio is 1% to 10%. A good credit utilization ratio is anything below 30%. These percentages reflect a credit card user’s statement balance divided by the account’s credit limit, with the product multiplied by 100. On a credit card with a $1,000 limit, for example, it would be best to use $10 to $100 each month, and no more than $300.”

Believe it or not, zero is never the best option. Creditors put more trust in those who show they can handle making charges and paying them off responsibly. Still, 0% utilization is better than high utilization. So if you’re choosing between the lesser of two evils, it’s better to have nothing to show than credit that reflects overspending.

Calculating Your Credit Utilization Ratio

As noted by Upgrade, “credit utilization ratios can be calculated for each credit card (card balance divided by card limit) and on an overall basis (total balance on all cards divided by the sum of credit limits).”

Again, financial experts say it’s ideal to keep your credit utilization below 30 percent. This percentage applies to each card separately and your total credit utilization ratio. If your credit utilization is higher than 30 percent, it will likely decrease your credit score significantly. Lenders tend to view a high credit utilization as an indicator that the borrower may already be financially overextended.

With this in mind, be sure to use your credit cards, but always within in reason. It’s a good idea to generally grasp where your credit utilization ratio stands before applying for any new cards. Ultimately, you’ll want to improve your credit utilization ratio for the sake of your credit.

Here are some key ways to do it.

Pay Down Your Debts and Avoid Excess Spending

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Worried your credit utilization ratio might be negatively impacting your credit score? Here are some helpful ways to bring it back up.

First things first, you should be focusing on paying down your debt, not tacking more of it on. Make sure that you’re paying more than the minimum on credit card balances monthly. Figure out what works best for your financial situation beforehand.

With credit utilization, billing cycles are evaluated closely. Are you able to make two or more payments on your credit cards at two separate points in one month? Even if the extra payment is a smaller amount, this method can really help bring your debt down and send your credit score back up.

Keep Track of What You’re Charging

It sounds straightforward, but it’s one of the most effective things you can do.

Per NerdWallet, “the simplest way to avoid losing credit score points for using too much of your limits is to watch how much you charge to each card. Make a habit of patrolling your online accounts to keep tabs on spending. If you are close to using 30% of your credit limit on one card, try to make a payment or switch to using another card.”

Consider Refinancing

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Refinancing your credit card with a personal loan can be helpful in more than one way.

By consolidating various credit card balances into a lower interest rate loan, you’re able to reduce the interest paid on that balance slowly but surely. In the process, you should be able to pay off the debt sooner. Typically, consolidating payments into one also helps many people get more financially organized and stay on top of due dates.

If considering this route, be sure to keep those credit cards open without racking up a new balance. After you’ve transferred the balance, open credit cards will help your credit utilization ratio keep dropping. Over time, this move can significantly help your credit score.

Increase The Credit Limit On Your Cards

Asking for an increased credit limit is another smart way to improve your credit utilization ratio.

It’s not always easy to steer clear of keeping your credit utilization ratio under 30%. For many people, it’s downright impossible. In turn, this solution might be a more realistic option for some. Don’t be afraid to ask for a credit line increase. The better your track record as a customer, the better your odds they’ll say yes.

A higher credit limit is a useful way to help keep your credit utilization lower than it would be at a lower limit. In the end, it could wind up making a major difference in your overall score.

Don’t Close Unused Cards

It might seem like a good idea to close credit cards you aren’t using. However, it may also do more harm than good. Closing an unused credit card account can lower your available total credit. In turn, your credit utilization rate will likely be increased. The impact of closing unused cards can greatly vary, but nine times out of ten, it’s not really a risk worth taking.

Always remember, creditors take as they can see into account. They’ll also look at the dates you opened and closed cards, going back to your oldest. To avoid a drop in your credit score, don’t close your unused cards, no matter how tempting.

Consider Applying For New Cards, But Be Careful

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Increasing your total credit limit by applying for new credit cards is another potentially good idea. As previously mentioned, a higher credit limit will bring down your credit utilization ratio. However, think carefully before making this move.

Opening a new credit card will not necessarily improve your credit score. If you are already in a financially strained place or overspending, a new card may contribute to more damage down the line. Not to mention, opening one too many lines of credit can add up. Any new account will be added to your credit report and could potentially cause your score to drop.

However, if you think you can handle another new account, start browsing new credit card options.

Find Out When Your Credit Info Is Being Reported

Typically, credit card issuers report your balance and payments to credit bureaus every 30 days. Unfortunately, the time they choose to report doesn’t always reflect when or if you’re actually paying your bills, especially if your billing cycle falls after the day your scores are reported. And this misrepresentation could easily, consistently, and unnecessarily damage credit score and utilization ratio.

So consider making a quick call to your card issuer’s customer service. You should ask when they report to the credit bureaus. Whatever date they tell you, try your best to pay as much of your balance as possible before that time.

Also, consider the AZEO method.

As explained by NerdWallet, “the AZEO (all zeroes except one) method involves paying off all but one of your credit cards in full by their statement closing dates rather than waiting for the payment due date. That gives those accounts a zero or very low balance when the issuer reports to the credit bureaus. On one card (which you pay in full by the due date), you keep your utilization low, typically less than 10%.”

However, you still should be focusing on keeping your credit utilization low in long-term ways, above all else.

Set Up Balance Reminders and Alerts

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Last but not least, don’t forget what needs to be paid and when. When it comes to staying financially on track, technology is your friend. The more helpful tools you employ, the less guesswork you’ll have to do when it comes to your credit.

If you haven’t signed up with your credit card issuer to receive alerts via text message or email, you should definitely look into it today. There are a variety of options to receive the type of alerts that best suit you. For instance, it may help to receive an alert when your balance hits a certain amount or an increasing percentage of your credit limit.

These alerts can help you work towards keeping the balance below 30%, and that should always be your credit utilization goal.

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