4 Ways to Lower Your Credit Utilization Ratio
Your credit card utilization plays an important factor in your overall credit score. In fact, the amount of credit you owe compared to your credit limit accounts for 30% of your overall FICO score! Because of this, it is so important to keep a low credit utilization ratio.
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So… what is a credit utilization ratio?
In a nutshell, your credit utilization ratio is the amount you owe in credit divided by your overall credit limit. To turn that number into a percentage, we multiply it by 100.
For example, if someone has a credit card balance of $975 and they have $5,000 in available credit, we could calculate their credit utilization ratio like this:
(975 ÷ 5,000) × 100 = 19.5
If you have more than one credit card account, your outstanding credit card debt will be totalled up and divided by your total credit limit among all accounts.
What is a good credit utilization ratio?
A low credit utilization ratio signals to creditors that you are responsible with managing your debt. In contrast, a high credit utilization ratio signals that you are overextending yourself financially.
Naturally, credit utilization ratios rise and fall throughout the month as payments and purchases are made. As a general rule of thumb, most experts recommend that people keep all balances under 30% of the total limit.
However, it’s important to realize that any revolving balance on a credit card is losing you money in compound interest!So, it’s in your best interest to pay off your credit card at the end of each month.
How to lower your credit utilization ratio:
Use Your Credit Card Less
Research shows that shoppers will spend up to 100% more on a purchase when using a credit card.
If you find that you are spending more money on your credit card than you are able to pay off each month, start using it less and opt to pay cash instead.
Pay Off Credit Card Debt
If you have a large amount of debt, one way to lower your credit utilization ratio is to start paying it off.
Not only will this help raise your credit score, but it will also save you money on interest rates!
Check out this post on How to Pay Off Debt Quickly for some amazing debt repayment tips.
Keep in mind that different credit leaders report balances to agencies at different times of the month. Because of this, it might take a few statement cycles for any changes to reflect on your score while you are paying off debt.
Sign Up for Balance Notifications
A major downside of using cards instead of cash is that it is much harder to visualize the amount of money spent.
Signing up for balance notifications is a great way to keep your debt in check, and help ensure that you don’t overspend. Balance notifications can typically be sent via text, email, or even through your notification center on your phone.
Keep Credit Cards Open
Closing a credit card that you aren’t using anymore can actually hurt your credit score!
Why?
Because closing a credit card removes its credit limit from your total available credit. If you owe a balance on other accounts and remove the limit from a card you no longer use, it will increase your credit utilization ratio overall.
Final Thoughts
Your credit utilization ratio plays an important part of your overall credit score. However, keep in mind that your credit score is also based on a number of other factors including payment history, length of credit, number of accounts, and hard credit inquiries.
It's always important to keep an eye on your credit report and dispute any inaccuracies that arise.
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