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Using credit cards the right way can help your credit score. Use them the wrong way, and you’ll have a high credit utilization rate, and that’s not good.
Fortunately, there are easy ways to lower your utilization rate and get your credit score back in line. If you’re wondering how you’ll fix your credit score, read on.
Why Your Credit Utilization Rate Matters
Your credit utilization rate tells lenders how much of your credit you use up at once. In other words, how much money do you spend that you can’t afford to pay off?
In a perfect world, you wouldn’t have more than 30% of your credit lines outstanding. That’s what the credit bureaus want. But life happens, just look at 2020 with millions of people out of a job! Sometimes we have to use our credit cards – there’s no way around it.
If you have more than 30% of your credit line outstanding, it hurts your credit score. The even worse news is it makes up 30% of your credit score. That’s huge, which is why your utilization rate is so important.
There’s good news, though. You can lower your credit utilization rate pretty easily and quickly, and your credit score should respond fast.
Learn: What Factors Affect Your Credit Score?
How to Lower Your Credit Utilization Rate
#1. Monitor Your Expenses Like a Pro
This is the easiest tip. Watch what you spend. Maybe that’s easier said than done, but honestly, keep track of what you spend.
If you can’t trust yourself to stay within your limits, set alerts with your credit card company. Log into your account online and set up a threshold.
Let’s say you have a $1,000 credit line, set your alert for $300 so you know when you hit your 30% threshold. That’s your sign to stop using it until you can pay it off in full.
#2. Pay Down Account Balances Early
Sometimes even if you pay your balance down or off completely, the credit bureaus don’t know it. If your credit card company reports balances before your payment is due, you could end up in that grey area where you look like you carry a high balance, but you don’t.
The only way around it is to pay your account balance early. Rather than waiting for your due date, pay the bill as soon as it comes or as soon as you can after it arrives. The earlier you pay your balance down, the better your chances of lowering your utilization ratio.
#3. Ask for a Higher Credit Limit
If you can’t get your balance paid down fast enough, consider asking for a credit limit increase. It has the same effect on your credit score, but just in the opposite way.
You’ll need a solid payment history to get the higher credit limit, so keep that in mind. Also, don’t use the increased credit limit as an excuse to spend more. The idea is to keep your credit utilization rate low to help your credit score.
#4. Don’t Close Credit Lines
It may seem smart to close credit lines, right? But this doesn’t decrease your utilization ratio. In fact, it increases it.
Here’s why.
Let’s say you have 3 credit cards each with a $1,000 credit limit and 2 with $500 outstanding. The third card has $0. With all 3 cards open, you have a 33% utilization ratio. If you close the $0 balance credit card, so you don’t use it, your utilization ratio increases to 50% because you lost the $1,000 open credit line.
When you close a credit line, it also hurts your credit score because it lowers your credit age. The longer you have credit open, the better it is for your credit score even though it only accounts for 10% of your credit score.
Related: Best Credit Monitoring Services
#5. Open a New Credit Card
Opening a credit card is another way to decrease your credit utilization ratio. When you add to your available credit and don’t charge anything, you lower the percentage of your outstanding debt to your available credit lines.
Be careful, though, new credit does two things to your credit score.
- Decrease your credit age. This may hurt your credit score slightly.
- Hits you with a credit inquiry which hurts your credit score slightly too.
Learn More: How to Build Your Credit
#6. Pay Off Credit Card Balances with a Personal Loan
If you can’t bring your credit utilization rate down, consider refinancing it into a personal loan. This only works if you do the following:
- Pay off all credit card debt with the personal loan
- Pay the personal loan payments on time
- Don’t use the credit cards
- If you use the credit cards at all, it must be less than 30% of your available credit
You may save on interest charges going this route, but again, make sure you can afford the payment. Don’t take on a debt you can’t comfortably afford.
#7. Limit Your Monthly Spending
If you set balance threshold alerts and you’re constantly going over your credit limit, consider setting up a new budget.
Revisit your expenses and income. Where are you, overspending? Find areas you can cut back and make room for the charges you’re putting on your credit card.
Try to only buy what you can afford to pay in cash. It’s a lifestyle change and may take some time to figure out, but limiting your monthly spending helps keep your credit utilization rate down, leaving you with a higher credit score.
Bottom Line: How to Lower Your Credit Utilization Rate
Don’t ignore your credit utilization rate. If you know your balances are high, figure out a way to bring them down. If paying the balances off isn’t an option, use one of the other tips to easily reduce your utilization rate and increase your credit score.
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