How to Improve Your Credit Utilization Ratio

Does your credit utilization ratio affect your credit score? Yes, and by as much as 30%, so your credit utilization ratio is significant.

There’s a lot you need to think about when staying on top of your finances. Your credit utilization ratio is likely one of the last things to come to mind. However, this can play an essential role in your financial health. Here’s what you need to know about credit utilization and how to improve your credit utilization ratio.

What Is Credit Utilization?

Your credit utilization ratio is essentially the amount of credit you’re using versus your credit limit. For example, if you can spend a maximum of $10,000 across all your credit cards, but your total balances are currently $2,000, your utilization ratio is 20 percent.

Experts say it’s a good idea to keep your credit utilization below 30 percent – cumulatively and per card. When you go over this, it can send red flags to the credit reporting agencies, which might, in turn, bring down your credit score.

Get More Credit

This might not be the best idea for your financial health if you’re struggling to keep up with your credit cards repayments. However, it’s important to note that one of the possible ways to improve your credit utilization is to simply have a higher credit limit.

The easiest way to get a higher limit is probably getting another credit card. It can then be tempting to start using that card; however, if you’re getting a card with the intent of boosting your credit utilization, it’s wise to shy away from actually using it for anything.

Get Rid of Your Debt

This plan is certainly easier said than done. However, it needs to be mentioned that paying down your debt is one method for how you can get a better credit utilization ratio. Budgeting is one of the best places to start if you’re looking for ways to reduce your debt levels.

By building a budget, you can identify areas where you might cut back on spending. Reapportioning your funds from expenses to debt repayment can get your credit utilization to a better place, while also saving you tons on interest payments.

Explore Your Debt Relief Options

Debt relief, management or consolidation might be the next best step for people struggling to get their credit usage under control.

Unfortunately, a consistently high credit utilization ratio sends the message that you’re unable to pay down your debt. This is both bad for you and the lenders who want to get it back eventually.

Working with a reputable debt relief can help specific consumers settle their debts in as little as 24 to 48 months.

Other options to explore include enrolling in a debt management plan (DMP) through a credit counseling agency or seeing if you can get a debt consolidation loan and use it to pay down your credit card balances.

Request a Higher Credit Limit

Another way to get your credit utilization to look better to credit reporting agencies is by requesting higher credit limits.

If you’re consistently making payments on your credit cards, it’s likely your credit card company will be okay with raising your credit limit. This can instantly bring down your credit utilization ratio.

As with getting a new card to improve your credit utilization, this approach can be dangerous if you immediately start using all that new credit. Not only does that negate the purpose of improving your credit utilization, but it can also get you into trouble down the line.

Pay Twice Per Month

It might seem odd, but paying your credit card bill twice per month is another way you can potentially improve your credit utilization.

By making two monthly payments, you’re not allowing your balance to get as high when you only make one. Doing this can keep your credit utilization from spiking toward the end of your billing cycle.

Credit utilization is important because it affects your ability to borrow. It also affects your credit score, therefore whatever you can to keep it below 30 percent – the lower, the better.

Other ways to improve your credit score, too, including paying your bills before the payment due date, don’t go into unauthorized overdraft and limit the amount of credit score inquiries as it may send the signal that you’re in financial difficulty.