Credit Utilization Rate: An insight into the secret that credit card companies would prefer you didn’t know. (The more you spend and don’t repay, the lower your credit score.)
Let’s say you have a $5,000 limit on your credit card. If you’re carrying more than $1,500 in fees month over month, which isn’t a good idea to begin with, it will likely cause your credit score to drop. That’s even if you pay on time every time. And not only will you have to pay interest on the charges that were deferred, but the ground you lost on your score could take a while to rebound.
Indeed, when you use more than 30% of a line of credit, it seems much less attractive to credit bureaus than, say, if you only use 10% or less of what is available. Logic? Maybe. Distressing for those looking for ways to boost their score before applying for more credit before a major purchase? Absolutely.
Your credit utilization ratio is the amount of credit you’ve used compared to the amount of credit you have, says Beverly Harzog, credit card expert and consumer credit analyst for US News & World Report: “It is important to know this because your credit usage represents 30% of your FICO score. To avoid damaging your credit score, your ratio must be below 30%. But consumers with high credit scores tend to have ratios below 10%.
When it comes to credit, the rules are not always intuitive. A majority of Americans, according to a recent US News & World Reports survey, say they don’t really understand how usage rate affects the triple-digit score that impacts so much else. In the December 2021 report, around 24% of respondents say a higher ratio is better (it’s not) and almost 36% admit they didn’t know one way or another. another one.
Here are some ideas from credit experts to reduce your credit utilization rate so you can start increasing your credit score:
Stop using your credit cards
“Credit usage is so critical to your credit score and it’s extremely important for consumers to get it under control,” says Bill Hardekopf with MoneyCrashers. That’s why his first suggestion for reducing your usage rate is to immediately put the plastic away and start paying with cash or debit card.
Request a credit limit increase
Research shows that at least 50% of credit card holders have never asked for their credit limit to be increased, Harzog says. So if you haven’t asked for a bump in a few years, or ever, there’s no better time than the present. If the answer is yes, increasing your credit limit should immediately lower your utilization rate. Remember, though, not to spend any more money on your credit card, which could eat up your new credit and defeat the purpose of asking for the raise in the first place.
Request a new card
It may sound far-fetched, says Hardekopf, but those with good credit can apply for a new card and, if approved, put it away in a safe place, but not spend: “I wouldn’t ask for a bunch of new cards, but You can get more credit (and a lower utilization rate) by getting more credit and not using it. Coming out of the worst part of the pandemic, he says, credit card issuers are competing for new customers.
Even if you plan to use a new card sparingly, be sure to shop around for the best rate. If you find one with a zero introductory APR, you can use it to transfer the balance from a higher card, which may not immediately impact your usage rate, but it may reduce your payments.
While some people might think you can only pay your credit card bills once a month, that’s not true for most accounts. “You can actually make multiple payments on your credit card bill throughout the month,” Hardekopf notes. When you make additional payments, it reduces your balance, of course, and the amount of interest you’ll be charged if you’re not within a grace period.
Pay the balance before the closing date
Ultimately, the best way to keep utilization low is to pay off the balance at the beginning of each month, says John Ulzheimer, president of The Ulzheimer Group“You need to get your statement balance as low as possible, if not zero,” he says. “The way to do this is to pay your balance before your statement closing date. This way, your statement balance is zero and this is what will be reflected on your credit reports. »