How to Improve Your Credit Utilization Ratio

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Last updated on February 28th, 2023

Spiraling inflation is leading to an overreliance on credit cards by millions of Americans. But o9ver-relying on credit cards can lead to significant financial distress, including debt, missed payments, and loss of credit opportunities. Here is how to lower your credit utilization, helping to raise your credit score:

What Is Your Credit Utilization Ratio?

You need a low credit utilization ratio if you want a high credit score. Suppose you want to qualify for the best interest rates and the most prestigious credit cards. In that case, you need a low credit utilization ratio. What is the credit utilization ratio (also known as credit utilization rate)? It’s a percentage of how much of your total available credit you are using.

To calculate the credit utilization ratio, divide your current balance amount by your credit limit. To determine your total utilization ratio across all your credit cards, follow the same procedure after adding all balances and all spending limits.

What is the Highest Credit Utilization Before You Harm Your Credit Score?

Keeping credit utilization low is essential for boosting your credit score – but how low should you go? Generally speaking, keeping your credit utilization below 30% is essential for slowly building your credit. If you want to build credit faster, try aiming for around 10% credit utilization.

The general rule of thumb is to maintain a utilization ratio of less than 30%, though ideally, it should be as close to 0% as possible. Why?

Suppose you are using a small portion of your credit. In that case, you demonstrate to banks and credit card issuers that you can afford to pay your bills and spend money responsibly. This is because the higher your credit use, the riskier you appear to potential lenders.

How Can You Decrease Your Credit Utilization?

If your credit utilization ratio needs improvement, or if you want to learn the best practices for keeping it low, here are some helpful tips:

Decrease Spending

The most straightforward way to ensure your credit utilization ratio stays low is to not spend less money. Set a budget that you can stick to, ensure that your necessary expenses are taken care of first, and keep your impulse purchases to a minimum.

Pay your Statement More Often

No boundaries are keeping you from paying your statement balance only once a month and only by its due date. Try dividing the amount you owe in two and task yourself with paying off each half on different dates. You might find erasing your debt more manageable. In fact, you could even think of it as a game; rather than dealing with one lump sum, chip away at your balance little by little until you can get it down to $0 before the statement due date.

Learn When Your Card Issuer Reports

Another reason to consider paying off your balance early and often is because, depending on when your card’s issuer reports your balance to the credit bureaus (TransUnion, Experian, and Equifax), your credit utilization ratio may be higher or lower than in real time. For instance, imagine your statement due date is on the 25th of the month, but the card issuer reports your balance on the 15th. Suppose you have a large balance and pay it off on the 20th. In that case, you will still have done your job responsibly. Still, your reported utilization ratio won’t reflect that until the following month. To keep your credit history accurate as often as possible, contact your card issuer and ask when they report customers’ balance information. After that, you can use either plan accordingly or ask to change your billing due date.

Setup Balance Alerts

Technology has made it easy for people to check their finances at a moment’s notice. However, even with such convenience, people may not develop a habit of keeping track of their credit card activity. If you don’t look at your online account often, try setting up alerts that will notify you when your balance has reached a certain amount. You can also go a step further and calculate your card’s 30% utilization number and set up an alert for when you hit a lower balance. That way, you can focus on paying down what you owe with room to spare.

Request a Higher Credit Limit

If reducing your average spending proves to be challenging, you can try a reverse method and contact your card issuer to ask for a higher spending limit. Doing so will increase your overall credit line and thereby lower your utilization ratio. There is a catch, though. The card issuer will most likely perform a hard inquiry of your credit report to determine whether you deserve an increase, which may negatively impact your credit score by knocking off a few points. In addition, the hard inquiry will remain on your credit report for about two years, so you’ll want to weigh those consequences before going through with your request.

Open a New Account

Applying for a new card is an alternative to asking for a credit increase. A new credit card has the same downside as asking for a spending limit increase on an existing card, though: You’ll have to take the hit of a hard inquiry. In addition, your application may be denied if your overall credit isn’t favorable.

Ideally, it would help if you aimed for a balance transfer credit card. The very best balance transfer credit cards provide lengthy 0% intro APR periods on balance transfers, low interest rates after that, and no annual fee. Many balance transfer cards also feature no balance transfer fees during a promotional period, making it even easier to increase overall credit while quickly dropping overall credit use.

Keep Inactive Accounts Open and Active

If you have one or more credit cards you no longer use, you’ll do yourself a favor by keeping them open. By closing untouched accounts, you’ll reduce your overall available credit, and your utilization ratio will rise. Plus, keeping all your accounts open is great for the length of your credit history, which influences your credit report and credit score. Being charged a fee for having an inactive credit card account is no longer common. Still, you can make a small purchase with it occasionally to be on the safe side.

Related Article: Rising APRs Require Credit Card Debt Strategies

Featured image by Matthew Henry/Burst

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About: Cory Santos
Cory Santos

Cory is the senior credit card editor at BestCards, specializing in everything credit card-related. He’s worked extensively with credit cards and other personal finance topics, including nearly five years at BestCards. Cory’s extensive knowledge is an essential part of the BestCards experience, helping readers to live their best financial lives with up-to-date insights and comprehensive coverage of all facets of the credit card space, including market trends, rewards guides, credit advice, and comprehensive credit card reviews.

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