Of all the factors determining your credit score, credit utilization management is second only to payment history. It shows you handle credit responsibly. Managing your credit utilization ratio can help you achieve your best possible credit score — but how exactly can you manage your CU ratio? It’s easier than you think.
What Is a Good Credit Utilization Ratio?
A CU is your credit balance subtracted from your credit limit. Use too much of your credit, and your credit score is likely to go down.
If you do not use your credit card at all, that gives you a zero CU rate. While that is the best CU rate, it makes little sense not to use a credit card unless it is saved only for emergencies.
Lenders like to see a CU rate that does not exceed 30 percent. If your card has a $1,500 limit, that means your balance should not exceed $450. If it rises above that, you could see a drop in your credit score. When the CU starts creeping up higher than 30 percent, it’s an indication that the person may have difficulty paying bills.
How to Calculate Your Credit Utilization Rate
First, it’s vital to learn how to calculate your CU rate. Start by dividing your total balance by your credit limit, and multiply by 100 to achieve the percentage rate. For example, if you have a balance of $200 and a credit limit of $1,000, your CU rate is 20 percent. That’s excellent. If your balance is $400 with a $1,000 credit limit, that is a 40 percent CU rate, which is high enough to negatively affect your credit score.
If you have two or more credit cards, combine your balances and divide that amount by your combined credit limits to discover your CU rate.
Now that you know how to determine your CU rate, here are some tips for CU ratio management:
1. Pay Down Balances
By paying down your balances, you can improve your CU rate. If you are only paying the minimum payment due, increase the amount. If you get a windfall, use it to pay down debt.
2. Spend Less
Maybe spending less is easier said than done, but it is one of the top ways to improve your CU. If your CU is greater than 30 percent, cutting back on credit card expenses can put the percentage back in positive territory.
One way to spend less successfully so that it is reflected in your CU ratio is by using a debit card for some of your expenses rather than a credit card. This is a wise move only if really cutting back on expenses is not realistic.
3. Increase the Credit Limit
If you have paid all your credit card bills on time, consider contacting the credit card issuer and requesting an increase in your limit. Make your case by providing documents showing your current income, percentage of income spent on housing and your employment information.
You will probably have better results by calling the issuer and speaking to a human being rather than filling out forms on the website. By talking with a representative, they might not need to perform a hard inquiry. A hard inquiry requires the lender to review your credit report before making a decision and that can temporarily lower your credit score.
An increase in your credit limit lowers your CU, as long as you keep your balances approximately the same. Of course, as long as you stay within a CU of about 30 percent, your CU is in good standing.
4. Avoid Closing Unused Credit Card Accounts
If you have credit cards you are not using, it sounds like closing the accounts would help your CU ratio. Although it seems counterintuitive, that is not true. The act of closing the account lowers the amount of credit you have, thus automatically increasing your CU rate.
5. Refinance With a Personal Loan
Refinancing credit card debt via a personal loan can consolidate your balances into one monthly loan payment, ideally at a lower interest rate. Your credit card utilization rate will promptly go down.
How ScoreMaster Can Help
Before you apply for a credit card, mortgage, auto or any other type of loan, you want your best credit score so you can take advantage of lower rates and better terms. ScoreMaster, with our gamified system, can help you achieve your best credit score. It allows you to manage your credit score as you spend. Contact ScoreMaster today and find out how you can raise your credit score by our average of 61 points in less than three weeks. Enroll in just one minute and get your points.
*Legal Disclaimer – ScoreMaster is a patent-pending educational feature simulating credit utilization’s effect on credit scores via payments or spending. Your results may vary and are not guaranteed.