One factor that significantly impacts your credit score is your credit utilization. Having high credit utilization can negatively impact your credit score. So if you’re looking to improve your credit score, it’s one of the main things you should not ignore.
But what is credit utilization, and how do you lower it?
What is credit utilization?
Your credit utilization is the percentage of the balance you use on your credit limits. It’s a huge factor when calculating your credit score. But why is it important? If your credit utilization is low, it shows lenders that you’re only using a small amount of your available credit.
It results in them being more willing to lend you credit. On the other hand, if your credit utilization is high, lenders will believe you’re relying too much on your credit, making them reluctant to lend you money. Luckily, there are a lot of things you can do to lower your ratio. Here are some of them.
Pay More Frequently
Credit card companies opt to report your balances to bureaus after your statement closes. The bureaus will then calculate your credit utilization ratio. However, it’s not always the case. Some credit card companies have different reporting dates and will send in whatever balance you have on your credit card.
While this can be an inconvenience, there’s a way for you to avoid being reported with a high credit utilization rate. A simple way to do this is to pay smaller and more frequent payments. This way, you’ll keep a low credit utilization rate. If you’re still confused, let’s see an example.
Let’s say you have a $2,000 credit limit and usually use up to $1,000 every month. You can always pay in full in the end, but if your credit card issuer regularly reports every middle of the month, they will report you with 50% credit utilization, which is terrible for your credit score.
However, if you pay every time you hit $250, your credit utilization rate will go down as low as 12.5%. It’s also beneficial if you get a loan from a bad credit lender since you have to pay a high-interest rate.
Open a New Credit Card
When you open a new credit card account, your overall available credit also increases. But of course, if you use up a lot of your credit limit on this new card of yours, then it’ll be useless. Also, you can hit two birds with one stone in this one if you look for a card with a 0% APR.
That’s because if you have a 0% APR, you can consolidate your debt into your new card and start paying it down without spending the interest. Take note, however, that most of the time., the 0% APR is only applicable for a few months or a year at least. Paying off your debt before the time runs out would be best.
Avoid Closing Down Credit Cards
That specific credit limit will also close down when you get rid of your credit card. It means that your credit utilization will also go up, which will negatively affect your credit score. But if you want to close an account, you should check first what would happen to your credit score when you do so. This service is free on most credit card issuers and is a great tool if you want to be careful with your credit score.
Ask for Higher Credit Limits
It can go hand in hand with the previous tip. If you’re looking to apply for a new card to increase your credit limit, you might want to ask your lender to give you a bigger credit limit.
It can significantly help your credit utilization rate as your percentage will decrease because of the significant addition to your limit. However, lenders only tend to do this when the borrower is credit-worthy enough. If you think your credit score is high enough, go for it.
Setup Balance Alerts
If you notice that you’re regularly overspending, it might be a good idea to set up balance alerts to keep your spending in check. You can even sign up for message alerts from your credit card issuer via text or email. You can be alerted once your balance reaches a specific limit. If you want to keep your credit utilization low, you should keep your spending below 30%.
Final Words
Your credit utilization ratio is one of the most significant factors in your credit score. Keeping it low at all times will give your credit score a massive boost if you’re trying to improve it. Luckily for us, there are a lot of ways we can lower our ratios, which are discussed above.
