The financial cost of credit card debt is bad enough. But when you think about its effects on other things — such as your credit utilization ratio — the burden can feel even heavier.
However, understanding credit utilization can help you formulate a plan to get out of debt and improve your score. These tips from US News My Money can help you lower your credit utilization rate and get your finances (and your credit score) back on track.
What Is Credit Utilization? Why Is It Important?
Credit utilization is the amount of credit you’ve used out of the total amount you have available. This figure helps lenders determine how close you are to your credit limit. For instance, if one of your credit cards has a $20,000 credit limit a $10,000 balance, your credit utilization ratio is 50%.
Lenders prefer customers with lower rates. Leslie Tayne, a debt resolution lawyer and the founder and managing director of Tayne Lay Group, told US News My Money, “A low credit utilization illustrates to lenders that you’re responsible with your credit. A high credit utilization can hurt your credit score.”
This factor makes up 30% of your overall credit score, so it’s essential to keep it low to avoid damaging your rating.
How To Lower Your Credit Utilization Ratio
Here are a few ideas to improve your credit utilization ratio.
Pay Off Credit Card Debt
This is the most straightforward answer, but in practice, it’s more complicated than that. You can implement strategies such as the snowball or avalanche methods, create a budget, or reduce discretionary spending, but you have to stick with them through the end.
If your score is in relatively good health, you could apply for a balance transfer card or a debt consolidation loan. These can lower your interest rate so you can put more money toward your balance so you can get out of debt faster.
On the bright side, you don’t need a 0% credit utilization ratio to help your score. It will gradually improve as you continue to lower your debt.
Pay Your Balance Before The Statement Closing Date
One way to improve your utilization rate is paying your balance before the statement closing date, so you should find out when this date is so you can plan accordingly. “The balance we owe on the statement date is what’s reported to the credit reporting agencies,” Credit Repair Resources president Chad Kusner explained.
So if you rack up a $2,000 balance and repay it before the monthly statement closing date, the credit card issuer will report a balance of zero to the credit bureaus, which will lower your overall utilization rate.
Keep Your Balance Low
When you need to work on your credit utilization ratio, Tayne recommends that you “Avoid spending more than you can pay off at the end of the month.”
But if you’re concerned about the temptation, you might want to keep your card in a secure place, rather than in an easily accessible spot in your wallet. Another idea is waiting 24 hours before buying something to decide if you really need to make that purchase.
You should avoid canceling your credit cards just to eliminate the urge to overspend. Doing so will increase your credit utilization rate and negatively impact your score.
Request A Higher Credit Limit
When you have a higher credit limit, but your balance is the same, your utilization ratio naturally improves. Increasing your limit while lowering your outstanding balances will give you even better results.
Remember that you have a credit utilization of 50% if you have a $10,000 balance on a credit card with a $20,000 limit. But if you raise your limit to $25,000, your ratio drops to 33% — almost the level you need.
Tayne explained that requesting your credit card provider for a higher credit limit can make it easier to manage your utilization. It would come in handy for instances where you need to make a big-ticket purchase that will take a few months to repay. But remember — just because you have a higher credit limit doesn’t give you the okay to increase your spending, too.
Become An Authorized User
One of the less well-known and unconventional ways to lower your credit utilization ratio is asking someone you trust to make you an authorized user on their credit card account. As Kusner explained, “You could have someone add you as an authorized user on a credit card account that has a low balance and a high limit and a great pay history. Now your aggregate or overall utilization will be lower.”
Kusner emphasized the importance of paying your balance on time and avoid overspending. The last thing you want to do is ruin a relationship because of irresponsible credit card use.
- Black, Michelle. “5 Ways to Lower Credit Card Utilization.” U.S. News & World Report, U.S. News & World Report, 12 Jan. 2021, creditcards.usnews.com/articles/ways-to-lower-credit-card-utilization.