The better your credit score is, the more financial perks you’re likely to get, like securing low credit card interest rates, landing a great loan or getting approved for your next apartment. You may already know that your payment history has the most sway over your creditworthiness, but don’t neglect the second most important factor determining your credit score: your credit utilization ratio. Here’s how to keep your credit utilization low, and why you really shouldn’t neglect it.
What Is a Credit Utilization Ratio?
Understanding and controlling your credit utilization ratio can have a major impact on your financial life. Your credit utilization ratio, also referred to as credit utilization rate, describes the percentage of your credit limits you’re using on your revolving credit (mainly credit cards). You can calculate it by dividing your credit card balance by the card’s credit limit. Then, multiply by 100 to get a percent. For example, say you have one credit card with a $1,000 spending limit. If you carry a $250 balance, your credit utilization rate would be 25%. With multiple credit cards, you can calculate your overall ratio by considering your total credit limits and balances across all your accounts. Credit scoring models look at both your overall credit utilization and your utilization rates for individual revolving accounts. This means maxing out one credit card can negatively affect your credit utilization ratio—and likely your credit score—even if you carry a low or no balance on another card. When it comes to your FICO Score the credit score used by 90% of top lenders, credit utilization rate accounts for up to 30% of your score. To keep your credit score high, your ultimate utilization goal seems simple: Keep your credit card balances low. However, it may not be realistic to assume you’ll never carry a balance from one month to another. When you do carry a balance, aim to keep your overall credit utilization ratio under 10% to help achieve a top credit score. To get in this range—and stay there—there are a few key tips to follow. Here’s how to manage your credit utilization rate effectively.
1. Pay Off Your Purchases the Same Day
You’re a smart spender: You swiped your favorite rewards card for cash back on your groceries or used your credit card for online shopping to cultivate more travel miles. To reap even more credit rewards, don’t wait until the end of the month to pay for everyday purchases. Instead, pay for your expenses the day you make the purchase. Using your credit card more like a debit card is the key to this strategy. This way, you get two additional benefits: First, you lower your overall credit usage; second, you avoid paying interest on your purchases. With the additional value you’ll get earning credit card rewards, this is the most financially savvy move you can make to keep your utilization rate low.
2. Make Multiple Payments in the Same Month
Similar to our first tip, making multiple credit card payments within the same billing cycle can be a great way to reduce your credit utilization ratio. For example, if you get paid once a week, commit to paying off your credit card balance once your paycheck arrives in your bank account. Credit card companies typically report account balances at the tail end of each billing cycle, so making several payments as you’re able during the month can reduce your ratio once your balance is reported. That may mean paying the bill early in addition to paying more than once—whatever works best with your budget.
3. Ask for a Credit Limit Increase
Here’s one simple strategy to lower your credit utilization ratio: Simply ask. Call your credit card company and request an increase in your credit limit. If they say yes, your available credit rises. By expanding your credit limit on one or multiple credit cards, you can lower your utilization rate—that is, if you don’t use the limit increase just to spend more. If you don’t trust yourself to keep your balance low with a higher limit, this is probably not the strategy for you. The card issuer may make a hard inquiry into your credit when you request a new credit limit, which can dock your score temporarily by a few points. But your utilization rate improvements may compensate for any temporary damage the inquiry may do to your credit score. There’s generally little to no harm in asking for a boost in your spending limits, but your card issuer isn’t obligated to grant your request. You can improve your chances of landing a roomier credit limit if you maintain a reliable relationship with your credit card company; they’re far more likely to increase your limit if you have a long history of on-time payments.
4. Use More Than One Credit Card
Big purchase coming up? Consider using multiple credit cards to cover it. We mentioned earlier that your credit utilization ratio is calculated based on your total utilization rate and that on individual accounts. So, if you have a big expense you plan to charge on credit, consider spreading the purchase over more than one credit card. You could also consider a new card with an introductory 0% APR (annual percentage rate) offer for purchases, balance transfers or both. That gives you some time to pay off the purchase without incurring interest. As a bonus, adding a new card to your repertoire will add more overall credit, which can help reduce your utilization ratio.
5. Keep Credit Accounts Open
You know that old credit card account you never use? Think twice before closing it. Unless you’re paying a lot in annual fees, it may be better for your finances to leave it open. Closing your account means removing some of your total available credit—not part of our recipe for a lower utilization rate. To keep benefitting from old, unused cards, try charging a small amount to the card on a consistent basis to keep the account active. For example, you can pay for your favorite streaming service subscription on a rarely used credit card and set up automatic payments to cover the monthly charge.
The Bottom Line
Keeping your credit utilization ratio low is one of the best moves you can make for your credit score. Whether you adjust your payment schedules or make a call to your credit card issuer, monitor your credit score regularly, which you can do for free with Experian. Your credit utilization ratio can fluctuate relatively quickly; scanning your credit routinely will help you manage both your utilization rate and credit score.