What’s the definition of credit utilization? It’s an important factor used in determining your credit score, and it’s the ratio of your outstanding credit card balances to your credit card limits. It’s a ratio that credit agencies use to determine how much of your available credit you’re using to gauge how responsible you are with your credit.
Depending on which credit scoring system you’re using, credit utilization can account for about 30% of your overall credit score, making it by far one of your credit’s biggest factors. Aside from payment history and length of credit history, credit utilization is one of the factors you’ll need to monitor if you’re looking to increase your credit score.
Need to know how to lower your credit utilization? We’ve got five financial tips to help you set yourself up for success.
How to Lower Credit Utilization
1. Pay More Than the Minimum
If you charge a lot to your credit cards and only pay the minimum, it’s pretty hard to reduce your credit utilization. This is especially helpful for those who have high amounts of debt that they’re struggling to pay off. Look at a debt payoff calculator to see how you can pay off debt faster.
It might also help to make two monthly payments instead of one. It’s easy to set a reminder like this, and it’s one of the simplest ways to keep your utilization rate low. So, even if you spend the same amount per month, paying off the balance once every two weeks will keep the utilization rate down so that it doesn’t go above the ideal limit of 30%.
2. Leave Credit Cards Open
Want to know how to avoid hurting your credit score? Don’t close old credit cards, even if you don’t use them! This can often damage your credit score because it reduces your overall available credit, thereby decreasing the spending limit you have to ensure you stay under the 30% credit utilization rate.
Even if you’re not using cards, it can be a good idea to leave them open. Unless you’re paying costly annual fees, there’s no harm in leaving the card open, especially if it’s a reward credit card that can earn you points, rewards, or cash back for specific spending categories.
3. Increase Your Credit Limit
If you’ve been a loyal customer to one credit card company for a while and consistently make payments on time, you might be able to call and request that they increase your credit limit. Over time, certain credit card companies will up your limit for you as part of a review process.
The key here is to continue spending like normal. Just because your credit limit is higher doesn’t mean you should spend more of it. Stick to spending as you were before. Now that your credit limit is higher, your previous spending limit and charges on the card will ultimately result in a lower credit utilization rate.
4. Spread Charges Out Over Different Cards
As the owner of more than a few credit cards (if that’s the case for you), you can spread out your charges across each of the cards, especially if one credit card has a much higher limit than the other ones.
The trick here, however, lies in learning how to still keep your overall credit utilization low. Most credit reporting agencies will calculate an overall credit utilization rate combining each of the rates from each card or revolving account. So, be sure you’re still staying below 30% across all accounts.
5. Decrease Your Spending
The easiest way to reduce your credit utilization and, in general, improve your financial health? Decrease your spending! This is especially helpful if you’re having a hard time meeting the minimum payments or are struggling to pay off your debt in general.
Try to download a budgeting app or research different budgeting methods such as zero-based budgeting to see what works best for you. Then, see how you can move your money around to spend less and save more each month. This should help you either decrease the amount you’re charging to your cards each month or save more to pay off more each month.
Monitor Changes in Your Credit Score
If you’re able to implement the above tips into your daily life, you’ll likely be able to lower your credit utilization rate. In turn, you should improve your credit score. To monitor any changes to your score, you can download an app to help.
Float is the first credit monitoring app that allows you to share your credit score with others. You choose how much information you want to share, whether that’s your credit score, a credit range, or just an emoji that indicates a range
Sign up today to get started tracking your credit score. Watch your wins and let others celebrate you with them too.