Building Credit: Know Your Credit Utilization Ratio

Your credit utilization ratio, also known as your debt to credit ratio, measures the amount of available credit you use compared to your credit limits. Your credit utilization ratio has a big influence on your credit score – it accounts for 30% of your credit score calculation. It isn’t a bad thing to use the credit you have; you just need to be mindful of how much you are using, since a high credit utilization ratio can result in a lower credit score. The suggested rule of thumb is to keep your credit utilization below 30% of your available credit. But once you’ve paid your balances down and your credit report updates, it won’t continue to affect your score.

Although carrying a high balance on a credit card for a short period of time doesn’t do long-term damage, it’s still important to keep your credit utilization ratio low. Since your credit usage has such a high impact on your overall credit score, a lower ratio can help boost your credit before major purchases like a car or a home. Here are some tips to help you build credit and lower your credit utilization ratio:

Pay Your Cards Down

The simplest and best way to lower credit utilization is to simply pay down your credit cards. Your priority should be to pay off your debt as quickly as you reasonably can. If you have extra savings, it may be advantageous to transfer some of that money to help pay your credit down. You could also consider taking out a personal loan, which would help you consolidate high-interest rate credit card debt into a lower interest installment loan.

While experts recommend keeping your credit card utilization below 30 percent, it’s important to note that creditors also check the total dollar amount of your available credit. This means that if you have a low credit limit, it probably won’t result in a huge blow to your credit score if your credit card utilization ratio is slightly higher than recommended.

Make Extra Payments

Making more than one payment per month will help you keep your balance from getting too high. If you get paid more than once a month, put a portion of each paycheck toward your credit card payments, even if it’s only the minimum payment amount. Every little bit goes a long way to lowering your ratio. And if you pay the minimum amount twice a month, you’ll get your card paid off in half the time. Your credit card issuer typically reports your credit activity to the credit bureaus once a month. If you pay off a portion – or even all – of your credit card bill before that date, it will lower your credit utilization.

Spread Out Your Charges

Using multiple credit cards will result in multiple accounts with low credit utilization rather than one account with high utilization. Don’t load up one card to 70 percent of the limit while leaving another with a zero balance. Spread your charges around, assuming interest rates and other terms are equal. Keep in mind, however, most credit scoring models look at your overall credit utilization ratio, so you still want to keep that number below the 30% threshold.

Increase Your Limits

If your income has increased, you’ve maintained a great credit history, or you have little debt, it doesn’t hurt to ask your credit lender for an increase on your credit limit. Just remember that this can sometimes result in a hard inquiry on your credit. If you lack excellent credit, you may want to consider opening a secured credit card and adding to its security deposit over time.

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