Simply put, your credit utilization is the amount of outstanding debt you owe as it compares to the total amount of credit you have available each month.
Depending on the scoring model used, your credit utilization makes up anywhere from 20% to 30% of your overall score. For this reason, one of the best things you can do to spark credit score growth is to reduce your credit utilization rate to at or below the recommended 30% ratio. Here are 5 ways to lower your credit utilization rate and achieve score success.
1. Pay Off Outstanding Balances
If you want to lower your credit utilization rate virtually overnight, paying off or reducing outstanding balances is a great way to do it.
For example, if you have a credit limit of $10,000, you should either pay off all charges in full or avoid carrying a balance over $3,000 (aka 30%) at the end of each billing cycle.
If you do not have the cash flow to eradicate all of your debt, try paying off the smallest balances you owe in full first. Alternatively, you should consider paying off lines of credit with the highest interest rate as a top priority. No matter which approach you take, eliminating debt is one of the fastest paths to a lower credit utilization rate.
2. Apply for a New Credit Card
Paying off debt is one way to lower your credit utilization rate, but it is not the only way. You can also apply for a new credit card.
When you add a new credit card to your holdings, you automatically increase the amount of credit you have available, and that, in turn, may help you lower your credit utilization rate. This strategy will be even more effective if you tackle your existing debt at the same time, but it can also be used on its own.
Keep in mind that fees and interest may apply when opening a new line of credit. A hard credit check may also impact your scores. Be sure to weigh the pros and cons before you act.
3. Request a Credit Limit Increase
If you do not want to open a new line of credit, try requesting an increase in the lines of credit you already have. Raising your credit limit from $10,000 to $15,000 will increase the amount of credit you have to work with, and that will automatically push your utilization rate down.
For best credit results, you should not use a limit increase as an excuse to overspend. Charging additional items and running up new debt will undo your hard work and increase your utilization rate.
4. Track Your Spending Carefully
As you work to lower your credit utilization rate, it’s wise to track your spending carefully. It is easy to overspend when all you have to do is sign your name, and before you know it, you have a balance you cannot pay in full.
These days it is easier than ever to keep tabs on your spending, so take advantage of the opportunity. Some financial institutions give you the option to sign up for text messages that notify you of every transaction, or you can simply sign in to your account and monitor your daily spending.
5. Pay Off Your Balances Early
You do not have to wait until the bill comes due to pay off your credit card balances. If you want to reduce your credit utilization rate quickly, consider making an additional mid-cycle credit card payment.
This simple trick can lower your credit utilization rate fast and potentially give your credit score a boost. You will obviously need the cash flow on hand, but if you can make an extra payment in the middle of the month it could positively impact your credit.
There are many ways to improve your credit score. However, lowering your credit utilization rate is one of the most effective ways to potentially increase your scores and make your financial life a lot easier. To check your current credit utilization rate and to access optional tools you can use to improve your credit as a whole, click below to launch ScoreShuttle.
Disclaimer: each person’s credit situation is unique. Results may vary, and ScoreShuttle makes no guarantee of any particular result. The information in this site is intended for general informational purposes only and is not to be construed as legal, tax, accounting, or other professional advice.