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How to Improve Your Credit Utilization Rate

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Your credit utilization rate is one of the most important factors in determining your credit score. Understanding it can help you keep your score in a range that’s attractive to future lenders.

Credit scoring models consider your credit utilization rate when calculating your credit score. Your FICO Score is determined by five factors. Credit utilization is the second most important factor in that scoring model. It makes up 30% of your FICO credit score.

What is a credit utilization rate?

Your rate, sometimes called your credit utilization ratio, is the amount of revolving credit you’re using divided by how much credit you have available. In other words, it’s how much you currently owe divided by your credit-limit total. Your credit utilization rate on individual credit cards is also important.

For example, let’s say you have two credit cards. Card A has a credit limit of $6,000 and a balance of $3,000. Its credit utilization ratio is 50%. Card B has a credit limit of $4,000 and a balance of $1,000. Its ratio is 25%. Your overall credit utilization ratio is 40%.

A low credit utilization rate indicates you’re far from using all of your available credit. To credit scorers, that shows you’re not overspending, said Gerri Detweiler, a credit expert, author and speaker in Sarasota, Fla. If you’re maxing out your credit cards, on the other hand, you look desperate to lenders.

Credit utilization rates are based only on revolving credit and don’t include installment loans like your mortgage, auto or student loan. Those factor into credit scores in a different way.

Revolving credit includes credit cards and lines of credit. The credit available to you is automatically renewed as you pay off debts. Each month, you can pay some, or all, of your balance and then borrow against the remaining amount of credit you have. You’ll also pay interest on the unpaid balance.

Paying your credit card balances off every month reduces your credit utilization rate. It also keeps you from having to pay interest charges.

Why your credit utilization rate matters

Because up to 30% of your credit score is based on credit utilization, this component is very important. Low utilization helps you build or keep a higher credit score, which makes it easier to qualify for loans and credit cards in the future. When you do qualify, you’ll be eligible for lower interest rates, too.

If the other components of your credit score are weak, your credit utilization ratio becomes that much more important. For example, payment history makes up the biggest portion of your score — 35%. If you don’t have that much credit history, then that part of your score will suffer. It therefore becomes all the more important that you keep your credit utilization rate low.

Detweiler’s 20-year-old daughter, who is in college, has a relatively short credit history compared with Detweiler’s own long, established history. “I have more leeway when it comes to higher utilization than someone like her,” she said.

If your credit utilization rate is high and you think it’s impacting your credit score, try to lower it. As a starting point, you want all credit cards at 30% utilization or less, Detweiler said. “If that doesn’t get you the results you want, then aim for 25% and then 20%.”

When you pay affects your credit utilization rate

Your credit utilization rate — and thus your credit score — can be affected when a credit card company updates your balance information with the credit reporting agencies.

Typically, credit card companies update this information every 30 days at the end of your billing cycle. But it’s hard to know for sure unless you call the credit card company and ask. It’s possible you could make a payment on one of your cards but not see the impact on your credit score for several weeks, when the credit card company updates your balance information with the reporting agencies.

A good option is to make credit card payments early, especially in the wake of a large purchase, Detweiler said. “Let’s say the billing cycle closes on the 28th (of the month). I might go in on the 23rd and make a hefty payment, knowing that will reduce the amount that’s reported to the credit bureaus,” she said.

Steps to improve your credit utilization rate

Here are some things you can do to improve your credit utilization ratio:

1. Pay off, or at least pay down, your debt each month. You want to keep your balances as low as possible. This has the added benefit of lowering the amount of interest you’ll have to pay on the debt.

2. Time your payments wisely. Call your credit card company and find out when they report your payments to the credit bureaus. If they can’t tell you, then pay your credit card bill before the end of your billing cycle. Or, make multiple payments during the month.

3. Apply for a personal loan to consolidate debt. Personal loans usually are reported as an installment loan since you’re borrowing a fixed amount for a fixed period of time. That means they won’t be included in the calculations for your credit utilization ratio.

4. Don’t close credit card accounts. Unless the annual fees are prohibitive, it’s best to keep old accounts open. Closing a card will lower the amount of available credit you have. It will also hurt another component of your score, credit history. The longer you’ve had a credit card, the better in terms of your score.

If the card has fallen out of favor in your wallet, make sure you still use it occasionally so the bank doesn’t close it due to inactivity. Keep the card open by making a small purchase on it every month and paying it off in full.

5. Ask your credit card issuer to increase your credit limit. This will give you more available credit, which will lower your utilization, even if you don’t pay off more of the balance.

Another option is to open a new credit card account. That option, however, has the potential to adversely affect your credit score. Whenever you apply for credit, the creditor pulls your credit report. Too many pulls in a short period of time can hurt your credit score.

Once you’ve lowered your credit utilization ratio, it’s important to stay on top of it. Check your balances every month, and if it looks like they’re going to be more than 30% of your total credit limits, make sure you pay them down.

It can help to sign up for balance alerts with your credit card company. You can set up the alerts so that whenever your balance reaches 20% of your available credit, you get a text message or email. That way you’ve got a little room to take action before you hit 30%.

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