4 Simple Strategies to Improve Your Credit Utilization Rate
Your credit utilization is a crucial component of your credit. It’s the percentage of the balance that you’re using on your general credit limit. If you’re not using any balance, your credit utilization rate is at its lowest.
This means that the more you borrow from your limit, your credit utilization rate increases. By any means, you should keep your credit utilization very low since the higher it is, the more points you’ll lose in your credit score.
But what is the credit utilization rate, and how do we keep it low?
What is Credit Utilization Ratio/Rate?
Your credit utilization rate/ratio measures the amount of balance you owe from your credit limit across all your credit accounts, lines of credit, etc. If you borrow from your credit limit, it will add to your credit utilization rate, and it’s in your best interest to keep it low.
But why should you care? Well, it’s because the credit utilization rate across all your accounts is a critical piece of how credit bureaus determine an individual’s credit score.
FICO and Vantage, two of the biggest credit agencies, list credit utilization as the second most important factor in calculating your credit score. In short, the more you borrow from your credit limit across all your credit cards, the higher the rate will be, which spells bad for your credit score.
That said, how do you keep it low? Here are some tips.
Pay Down Your Debt
Yes, it’s that easy. Paying down your debts will decrease overall spending while slowly decreasing your credit utilization rate. There are a lot of ways to do this. One good example is to pay the balance back immediately after using a card for a purchase.
Another thing you can do is only to buy things that you can pay off after the end of the month. This is important because you know how credit card issuers report your account in credit bureaus.
During that time, the credit bureaus will be calculating your credit score, which means that if you haven’t paid anything in your balances yet, you’ll still have a high credit utilization rate. You can also use this to your advantage by paying more than the minimum amount during your monthly dues to pay twice a month if you have the budget.
Ask for a Credit Limit Increase
Another good strategy to lower your credit utilization rate is to ask your credit card issuer if they can give you a higher credit limit. Most of the time, you can negotiate this with your credit card issuer. If they say yes, then they will make your credit limit higher. Usually, you’ll have to meet some requirements before they can give you one.
Also, you should note that requesting a higher credit limit creates a hard inquiry on your credit report. This is not a cause for concern per se, but if you have made a financial decision that also recently caused a hard inquiry, you may want to hold off on that request. This is because multiple hard inquiries in a short period can significantly reduce your credit score.
Use More Than One Credit Card
Do you have a big expense coming up soon? Then you may want to finance it through multiple accounts. Sure, the credit limit usage might be the same, but at least it will be easier to manage. However, you can take it up by using one credit card and financing the rest with a personal loan from lenders like CreditNinja.
That will reduce half of your planned credit utilization rate since you’ll purchase the rest with a personal loan. This is also better if you get a new easy application personal loan along with a credit card with 0% APR from another company. This will give you time to pay off your balance without any interest, and the added credit limit will do nicely on your credit utilization rate.
Keep Your Credit Accounts Open
Do you have multiple credit cards that you’re not using anymore? If you’re planning to close them down, you should hold off on that decision. This is because even if you’re not using those cards anymore, their credit limit still contributes to your overall credit limit. If you close them down, your overall credit limit will be reduced, directly making your credit utilization high. Not to mention that having old accounts can improve your credit score since it’s also a huge factor in calculating it.
Your credit utilization rate is one of the most important factors in determining your credit score. You can do many things to keep it low, like paying down your debts or increasing your credit limit. Luckily for you, these are very straightforward things to do, so if you want to improve your credit score, you might want to sort out your high credit utilization rate by following our tips.