Your credit utilization, or the percentage of your credit limit you’re using, is an important factor in determining your credit scores.
Because a high utilization rate may indicate you have trouble managing credit, a lower utilization rate is generally better for your credit scores. Lowering your balance and effectively managing your available credit can improve your credit utilization rate and, in turn, your credit.
What is credit utilization?
Credit card utilization rates are relatively simple to calculate. First, find the credit limit on your credit card account. Then, divide your current balance by your total credit limit to find your credit utilization rate.
For example, if you have a $5,000 credit limit and a balance of $1,000, your credit utilization rate is 20%.
If you have multiple credit cards, you can add up all your balances and divide that by your combined credit limits to calculate your overall credit utilization rate.
Unlike some other credit score factors, improving credit utilization can improve your credit scores quickly. Credit scores may take years to recover after a late payment, but reducing utilization can have a more immediate impact.
Keep in mind that experts generally recommend you keep your credit utilization below 30%.
How to lower your credit utilization rate
Here are six strategies that can help you lower your credit card utilization rate.
1. Pay down your balance early
Your credit card utilization rate is typically based on the balance your card issuer reports to the credit bureaus. Typically, issuers report the balance at the end of your billing cycle.
That means your issuer may report your balance for the billing cycle before you pay it off, and this reported balance contributes to your credit utilization.
However, if you pay down part or all of your balance before the issuer reports it, your credit utilization rate for that card will be lower. You can ask your issuer when they report to the bureaus to be certain.
2. Decrease your spending
If you’re working to pay down credit card debt, it can be helpful to stop making purchases with your credit cards. Otherwise, new purchases may offset your payments, and your credit utilization rate may not decrease.
By switching to a debit card or cash for purchases, your credit utilization rate could drop as you pay off existing debt.
3. Pay off credit card balances with a personal loan
Because credit utilization rates only apply to revolving credit, you could take out a personal loan to pay off your credit cards. This would move the debt to an installment loan, which is a loan you repay with a set number of scheduled payments.
To do this, you’ll need to qualify for a personal loan, which will likely trigger a hard inquiry and may come with an origination fee. To get the best interest rates, you usually need to have strong credit.
It’s typically only a good idea to take out a personal loan for debt consolidation if you can qualify for a lower rate than your credit card APR.
4. Request a credit limit increase
Another way to lower your credit utilization rate is to increase your total credit limit. You can call your credit card issuer to request a credit limit increase or make the request online. Requesting a credit limit increase may result in a hard inquiry, which could cause a small, temporary dip in your credit scores.
5. Open a new credit card
Opening a new credit card is another way to increase your total available credit. However, you often won’t know the credit limit until after you’re approved, as it will depend on factors such as your income and credit history.
Similar to requesting a credit limit increase, applying for a new card generally results in a hard inquiry.
6. Keep unused cards open
While it may seem like a good idea to close credit card accounts you don’t often use, closing an account can lower your total available credit. A lower total credit limit will, in turn, increase your overall credit utilization rate.
Closing an account can also affect your credit age, and the impact depends on the scoring model. Some models weigh the age of your oldest open account — so if you close that one, your credit score may drop.
Next steps
Managing your credit utilization can help improve and maintain your credit score. Focus on both parts of the equation — your balance and your credit limit — and aim to keep the ratio low for the greatest impact.
With Credit Karma, you can monitor your VantageScore® 3.0 credit scores from Equifax and TransUnion for free. You can also track your credit utilization and see how changing your ratio affects your scores over time.
Credit Karma also offers free credit monitoring and can alert you to key changes on your Equifax and TransUnion credit reports.
FAQs about credit utilization
There is no product called a low-utilization credit card — any card can have low utilization if its balance is low compared to its limit. Try to pay your balance in full each month to keep credit utilization low. Experts generally recommend keeping credit utilization below 30%.
Many experts recommend keeping your credit utilization rate below 30%. While this is a common guideline, a lower rate is better. Consistently maintaining a low credit utilization rate can have a positive impact on your credit scores.
A 0% credit utilization rate is not necessarily bad, and it’s better for your credit scores than a high rate. However, some credit scoring models may interpret a consistent 0% utilization as inactivity. Lenders look for evidence you can manage credit effectively, so making small purchases and paying the statement in full each month can be beneficial. Making automatic payments can help ensure you always pay on time.