6 ways to lower your credit card utilization

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In a Nutshell

Your credit utilization rate, the amount of available credit you use at any given time, is one of the most important factors in determining your credit scores. Here are ways you can lower it.

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You’ve heard you should keep your credit card utilization under 30 percent. Here’s why it’s important and how you could do it.

Your credit utilization— the percentage of your credit limit that you’re using—is one of the most important factors in determining your credit scores. Because a high utilization rate could indicate you’ll have trouble paying your bills on time, a lower utilization rate is generally best for your credit scores.

There are several ways to change your balance or available credit. This can help you improve your credit utilization rate and your credit as a result.

  1. Pay down your balance early.
  2. Decrease your spending.
  3. Pay off your credit card balances with a personal loan.
  4. Increase your credit limit.
  5. Open a new credit card.
  6. Don’t close unused cards.

Credit card utilization rates (also known as credit utilization ratios) are relatively simple to calculate. First, look for the credit limit on your credit card account. Then divide the balance on your monthly statement by your credit limit, and that’s your credit utilization rate.

So, if you have a $5,000 credit limit and spend $1,000 during your billing period, your credit utilization rate will be 20 percent ($1,000 divided by $5,000 – multiply that number by 100 get the percentage.)

If you have several credit cards, you can combine the balances and divide that number by the combined credit limits to find your overall credit utilization rate.

Lowering your credit utilization rate could be a great way to boost your credit.

Unlike some other credit score factors, “utilization is a powerful tool for improving your credit in a short time frame,” says Sarah Davies, senior vice president of analytics, research and product management at VantageScore.

It can take months or years for your scores to recover after a late payment or bankruptcy. However, “if you could pay down all your credit cards in one month, your credit could improve dramatically,” Davies says.

Whether you’re looking for a quick boost or want to learn how to sustain good credit, here are six ways to lower your credit utilization rate.


1. Pay down your balance early.

One tricky point about credit card utilization rates is that your usage depends on the balance that your card’s issuer reports to the credit bureaus, not how much you spend each month. Those two numbers aren’t always the same.

Also, your issuer may not even report to all three of the major credit bureaus, Equifax®, Experian® and TransUnion® — and in some cases, it may not report to any of them.

Typically, issuers report the balance at the end of your billing cycle.

However, some issuers may send the data at the same time each month for all cardholders, regardless of when your billing cycle ends. Your best bet may be to ask your issuer so you can be certain.

What this means is that your issuer may report your billing cycle’s balance before you pay it off. This reported balance will add to your credit utilization.

However, if you pay down part, or all, of your balance before issuers report your balance for the billing cycle, your credit utilization rate for that card will go down.

2. Decrease your spending.

If you’re working to pay down credit card debts and can’t afford to make partial or full payments early, it can be helpful to stop using your credit cards to make purchases. Otherwise, your new purchases may offset your payments, and your credit utilization rate won’t go down.

Switch to a debit card or cash for your regular purchases, and as you make credit card payments to pay off debt, your credit utilization rate could drop.

3. Pay off your credit card balances with a personal loan.

Because credit utilization rates are a reflection of how you use revolving credit, you could take out a personal loan, pay off your credit cards and effectively move the debt to an installment loan (potentially with a lower interest rate than your credit cards). 

 

However, there are multiple drawbacks to this approach. You’ll need to qualify for the loan and may have to pay an origination fee on the money you borrow.

And to qualify for the best interest rates on a personal loan, you need to have excellent credit (in addition to other factors). If you have average or poor credit, the interest rate on the personal loan may be higher or lower than that on your credit card(s).

4. Increase your credit limit.

Another way to improve your credit utilization rate is to increase your credit limit.

You can call your credit card’s issuer to request a credit limit increase, or you may be able to make the request online. Your card’s issuer may have criteria you need to meet, such as having your account for a specific period of time.

The lender will likely also base its decision on your usage and payment history with the card – so if you have a history of late payments, you’re unlikely to be approved for a limit increase.

Requesting a credit limit increase can result in a hard inquiry, even if the issuer doesn’t approve your request. The inquiry could ding your credit slightly depending on the rest of your credit, although this impact can vary widely depending on the rest of your credit. For example, if you have little credit history, a hard inquiry may impact you more.

Learn how to ask for a credit limit increase

5. Open a new credit card.

Another way to increase your available credit is to open a new credit card.

You won’t necessarily know what the credit limit will be until after you’re approved because it depends on the issuer’s consideration of multiple factors, such as your income and credit history. Some cards may have a minimum credit limit.

For example, some Visa Signature® and World Elite Mastercard® cards have a minimum $5,000 credit limit. But even with these types of cards the minimum limit can depend on the card or issuer and you won’t necessarily get a high credit limit.

As with requesting a credit limit increase, applying for a new card generally results in a hard inquiry regardless if the issuer approves your application.

6. Don’t close unused cards. 

As you take steps to get your credit in order, you may want to clear out financial clutter by closing credit cards that you don’t often use.

While this could make managing your wallet easier, closing an account can also lower your available total credit and increase your credit utilization rate.

Davies says the impact of closing an account depends on the credit scoring model. For example, some credit-scoring models may consider the age of your oldest open account. If you close that account, your credit scores could drop.


Bottom line

Managing your credit utilization rate can be a simple way to help improve and maintain your credit. Focus on both parts of the equation — your balance and your credit limit — and look for ways to decrease and maintain a low ratio for the best possible impact.

While recovering from a late payment or another derogatory mark can take months or years, lowering your credit utilization rate could result in a quick, significant improvement in your credit.


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