7 Simple Tactics to Improve Your Credit Utilization Ratio
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If you’re feeling the pressure to make monthly payments while also keeping your utilization ratio low, you’re not alone in the struggle. For many homeowners looking for the best heloc rates Long Island, maintaining a good credit utilization ratio isn’t easy, but it’s worth the effort.
Credit Utilization Ratio
Utilization ratio measures how much available credit you use on revolving accounts such as credit cards and personal loans. It is usually expressed as a percentage. It’s important to note that this percentage does not include balances from installment loans like mortgages or car loans. It is because those have set repayment schedules rather than open limits.
Calculating Utilization Ratio
To calculate your ratio, first, you need to total all the balances owed across your different accounts. You then add up the spending limits for all those same accounts. To get the ratio, divide the grand total of balances by the total of the limits. Then, multiply this number by 100 to get the final percentage amount. Let’s say your only line is a card with a $2,000 limit. And right now, you owe $1,000. To figure out your utilization, you would:
$1,000 balance / $2,000 limit = 0.5
0.5 x 100 = 50%
In that case, your utilization ratio would be 50%.
Ideal Utilization Ratio
A high credit usage indicates that you have trouble making all your payments on time. Lenders prefer seeing that you don’t rely too heavily on credit. Keeping your balances low compared to your spending limits puts lenders at ease and is better for your scores overall. The closer your utilization is to 0%, the better.
However, it’s important to note that 0% isn’t ideal. You should keep the utilization percentage lower than 30%, preferably in single digits. While having no utilization at all won’t necessarily harm your score, it may not help it much.
That’s because bureaus want to see that you can responsibly manage some credit and make timely payments. Agencies can’t evaluate your creditworthiness if they don’t have any information on how you’ve handled credit in the past. Having a zero makes you more of an unknown.
Lowering the Utilization Ratio
You can use many techniques to maintain a good credit score. In fact, you can even boost your credit score with AI. However, this section will focus on keeping a high score by maintaining a low utilization ratio. Scoring models can consider your ratio when calculating your score. The utilization ratio has a direct impact on your score.
1. Limit Adjustments
If your limit feels restrictive, you could ask the company to raise it. The initially approved limits for you depend on your financial details. If your financial circumstances have strengthened over time, such as a salary increase, the lender may reconsider and boost your limit.
Established customers with a solid record of on-time payments are more likely to get increases. Some lenders even automatically raise limits for trusted clients in good financial standing. Only apply for a raise if you’ve made all your payments on time and your score is good. Otherwise, the issuer might lower your limit instead of raising it. Be careful not to spend more just because the limit went up.
2. Pay Before the Report Date
You should pay your balance before the reporting date as it allows you to report a lower dollar balance, which leads to a lower utilization rate. To do this, you need to know three important dates: the statement date, the due date, and the reporting date.
The statement date is when the company takes a snapshot of your account activity for the month. The statement will show the statement balance, which is what you owe at the end of the billing period. You calculate it by taking the previous balance, plus or minus any new charges or payments during that month.
The other key date is the due date. It is when at least the minimum payment on your statement is due. You’ll get hit with a late fee if you don’t pay the minimum by this date. Then comes your balance reporting date, which is when the amount owed is sent to the bureaus. Contact your company to learn the reporting date. Once aware, you can then ensure your balance is paid down in advance of that reporting date each month. Late payments reported to bureaus could lower your credit score over time.
For example, imagine your due date is always the 20th of each month while the reporting date is the 15th. If, on the 15th, you happened to have a balance of $2,000 reported, and your total limit was $5,000, the bureaus would calculate your utilization as 40% ($2,000/$5,000). Even if just a few days later, on the 19th, you would pay your full statement balance.
3. Use Multiple Cards
While you may have a card or two you use most often, concentrating too much spending on a single card could cause its utilization level to rise significantly. Distributing expenses across several accounts helps maintain lower utilization balances on all cards reported each month.
4. Don’t Close Cards
Keeping an unused card open may seem unnecessary, but closing that account could hurt your ratio if the balances on your other cards stay about the same. Your total debt wouldn’t change, but your overall available credit would decrease if you closed that line. Keeping the account active is better as long as the card’s annual fee does not outweigh the credit line’s benefit.
5. Open a New Card and Set up Alerts
Applying for a new card is another method to raise your total available credit. However, the exact limit for a new account won’t be determined until after approval. Companies look at your income and credit history to decide your limit. Setting up balance alerts can help people who struggle to track what they owe. You can ask your company to send you notifications when you reach a certain balance level.
6. Consolidate Debt
Consolidating your card debt means taking out a new loan to pay off all your cards. Instead of paying different amounts to different cards monthly, you just make one payment, making your finances easier to manage. The goal is to get a lower monthly payment and interest rate than you currently pay on individual lines. Common options for consolidation include a personal loan, balance transfer credit card, or home equity line of credit (HELOC).
7. Avoid Excessive Spending
The percentage of your balances compared to your limits matters more than the actual dollar amounts. For example, a $200 balance with a $300 limit would mean your utilization on that account is 66%. On the other hand, a $200 balance with a $1000 limit would mean your utilization on that account is only 20%. If you tend to overspend or have lower limits, try not to rely on your cards too frequently.
Endnote
These ongoing habits of paying down balances in a timely fashion and not maxing out existing credit demonstrate responsible credit management to lenders over time. Monitoring your utilization is a simple way to boost your credit report. Compared to fixing a late payment or other negative marks, lowering your ratio can substantially and quickly lift your score.
