There are many factors that influence your credit score which can positively or negatively impact your ability to attain fair and affordable financing.
While your payment record may be stellar, your credit card utilization is also factored in and represents approximately 30% of your credit score calculation. If your utilization is low, it can help your credit score but if it’s very high it can be lowering your score substantially – even with no late payments.
What is Credit Card Utilization
Credit card utilization is the ratio of credit used to credit extended – it is simply calculated by dividing your credit card balance by your credit card limit, and multiplying it by 100.
Credit Reporting Agencies pay close attention to your Credit Card utilization for the following reasons:
- The more credit you utilize, the higher the risk of default or late payments
- It may indicate financial instability (Using high amounts of credit to cover cash flow shortage)
- If you are already using a large percentage of your extended credit, and are seeking more financing – it may appear you cannot pay off your current debt
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So What’s Considered “Good” Credit Card Utilization?
In terms of a good score – the answers vary. Some say under 35% is ideal, most advise for 30%, while some experts say to keep it as low as 25%. There is one consensus – that whatever ratio is ideal isn’t an absolute threshold. Your score won’t skyrocket at 31%, nor will it be perfect at 24%. There are lots of factors that are used in a reporting agencies algorithm to increase accurate scoring.
How to Lower your Credit Card Utilization
It is fairly simple – start by paying off your balance. As cards begin to be paid off, you can then leave the accounts open.
This increases the amount of available credit you have extended that is not in use, which lowers your utilization ratio. A short-term trick some people try is to open new lines of credit to lower their ratio, but this is not advisable due to “hard credit inquiry checks” that will lower your score.
Follow these 5 simple tips:
1 – Set up and receive balance alerts –
Have a hard time remembering to check your accounts? You can sign up to receive balance alerts via text or email. You can set the alert in a way to receive a notification when your balance hits the 20% available credit. This way you will know when you are close to the 30% threshold.
2 – Request a credit limit increase –
If your credit utilization is more than 30% and less than 40%, call the issuer and ask for a credit limit. If your income has increased since you applied for a credit card, there is a good chance that they will automatically increase the limit for you.
3 – Pay off your balance twice a month –
Lenders usually report your financial status once a month. If you currently pay your credit balance once a month and your lender reports it when you’re close to the end of the cycle and your balance turns out to be high, your credit utilization ratio will also be reported as high. By paying your balance twice a month, then you will constantly be reported as having a lower utilization rate.
4 – Pay your bills before the due date –
Paying your bills on time is great, but consider paying them before the due date. Credit bureaus report your statement balance after it’s posted. If you wait until after you receive your bill to pay your credit, even though it’s still awesome, it will affect your credit utilization. Just a few days here and there makes a huge difference!
5 – Pay with cash instead of card whenever possible –
Don’t use credit cards to make small purchases if you can pay it with cash instead. Sometimes the reason for big credit card balances is using your card often towards frequent small purchases, which eventually increases your credit utilization ratio. Pay with cash when you can.
Remember, raising your credit card score is a combination of many factors that require patience – so slowly chip away at it, and you’ll be on your way to a better score.