Perfectly Balanced as All Things Should Be: Your Guide to Obtaining Great Credit Utilization

by Susan Paige on April 8, 2019 · 0 comments

Americans carry a staggering amount of credit card debt. How much? One billion dollars in 2018!

All that debt can affect your credit score and not necessarily in a good way.

Credit utilization is one of the main factors that go into your credit score, so it’s important to know what it is and how to improve your credit utilization ratio. Keep reading to find out more about that and how you can raise your ratio and your score.

What’s a Credit Score?

Your credit score represents all the things that go into your credit report. Your report is basically a snapshot of your financial life. It includes all your debts, including your credit cards; it also tracks your payment history and how long you’ve had any credit.

A credit score is a three-digit number that typically ranges from 300 to 850, depending on the type of credit score that’s being calculated. The most common is your FICO score (it was developed by the Fair Isaac Corporation, hence the name).

If you’ve ever applied for a mortgage or a credit card, the lender looked at your credit score. The simplest way to explain the value of that number is this: the higher the number, the more likely a lender is to believe you’ll pay back what you borrow. The higher, the better.

What Is Credit Utilization?

Simply put, your credit utilization is the amount of available credit you use. Say you have one credit card with a $1,000 limit, and you’ve used $500 of it. That $500 is your credit utilization.

What Is a Credit Utilization Ratio?

The ratio is the amount of available credit you’ve used, expressed as a percentage. So, using the above example, your utilization ratio is 50%. Credit utilization is the second most important factor in calculating your credit score, after your payment history.

Keeping your credit utilization ratio below 30% across all your accounts is optimal. That demonstrates to a lender that you’re being responsible with your credit and aren’t borrowing too much.

If yours is higher than 30%, don’t despair. There are some quick and easy ways you can raise your credit utilization ratio and improve your score.

How to Improve Your Credit Utilization Ratio

Start by spreading your spending out across all your credit cards. If you’re approaching the 30% mark on one, switch to another.

If your credit score isn’t great, but you’re looking for a new card, learn more about cards for people with fair credit.

Request a higher credit limit. The idea is not to give yourself more money to spend, but to increase the amount of available credit you have, relative to how much you’ve used.

Look at that credit card with the $1,000 limit. If you’ve spent $500, your ratio is 50%. If you can raise the limit to $2,000, now your utilization is only 25%.

Keep your old credit cards open. It might be tempting to close a card you never use, but you’re better off keeping it open. The credit limit on that card counts as available credit and helps keep your utilization low.

Pay your bill mid-cycle. Credit companies report to the credit bureaus every month, and they do it at different times. If you can pay your bill before the credit card company submits a report, your utilization will appear lower.

Finally, you can always consider renting someone else’s credit score.  In the industry, this is known as tradelines.  The main idea with tradelines is someone else, with better credit than you, adds their loan, mortgage, or what have you, to your account.  Their payment history, debt to income ration and other metrics should improve your overall score one their information is added.   Its not free and its not commonly practiced.

It’s important to keep track of all your accounts, so you can keep up with your credit utilization. There are a number of apps that can help you do that.

Final Thoughts

Here’s one more idea to consider if you’re trying to improve your credit utilization. Refinance your credit card debt with a personal loan. This only applies if you have good to excellent credit.

By doing so, you’re converting revolving debt (credit card debt) into installment-loan debt, which will significantly lower your credit utilization ratio.

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