Last updated on July 17th, 2020
If you want a high credit score, you need a low credit utilization ratio. If you want to qualify for the best interest rates and the most prestigious credit cards, you need a low credit utilization ratio. What is 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 it, all you have to do is divide your current balance amount by your credit limit (This formula will give you a decimal number; to interpret it as a percentage, multiply the result by 100). To determine your total utilization ratio across all your credit cards, simply follow the same procedure after adding all balances and all spending limits. 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? Having low utilization shows lenders and creditors that you don’t need to borrow much money at any given time, as well as that you are responsible with fully paying back what you owe, and on time. If your ratio needs improvement, or if you just want to learn the best practices for keeping it in the green, follow the tips below and choose the one that best aligns with your circumstances.
Decrease your spending
The most straightforward way to ensure your credit utilization ratio stays low is to not spend less money. That’s not to say that you shouldn’t treat yourself occasionally, but making large purchases that you can’t pay off in full before your next billing cycle will only restrict your credit usage. 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 balance earlier and more often
There are no boundaries keeping you from paying your statement balance only once a month and only by its due date. If you 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 your account balance
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 of the month. If you have a large balance, and you pay it off on the 20th, you will still have done your job responsibly, but your reported utilization ratio won’t reflect that until the following month. In order 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 either plan accordingly or even ask to have your billing due date changed.
Set up balance alerts
Technology has made it very 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 what your card’s 30% utilization number is 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.
Ask for 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 are deserving of an increase, and this 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 credit card account
An alternative to asking for a credit increase is applying for a new card. Doing so has other benefits besides giving you more available credit; you could have access to a new set of rewards, a juicy signup bonus, or cardmember-exclusive discounts. 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. You could always check if you’re pre-qualified, though, thereby greatly increasing your chances of being approved and having more credit to work with.
Keep inactive accounts open
If you have one or more credit cards that 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 as a result. Being charged a fee for having an inactive credit card account is no longer common, but you can make a small purchase with it occasionally to be on the safe side. Plus, keeping all your accounts open is great for the length of your credit history, which influences your credit report and credit score.