Lower Your Credit Utilization: Tips and Tricks

Maintaining and improving your credit score can seem like a full-time job. Time and diligence are needed, and most importantly, knowledge. If you want to improve your score, understanding the makeup of a good credit report is imperative. For example, something termed your “utilization ratio” accounts for about 30 percent of your total credit score. This number represents the percentage of credit cards and other revolving debt you owe, compared to the sum of your total credit limits. For example, if your four credit cards carry a total balance of $6,000 and your aggregate credit limits are $24,000, then your credit utilization ratio is 25 percent (e.g., $6,000/24,000=.25). One of the best ways to improve credit score health is to creatively manage that ratio. Review the following tips and tricks, and you may find that accomplishing this goal may be easier than you think.

    • Know where you stand. Improving your credit score with debt is all about maintaining a credit utilization ratio of 25 percent or less. With that in mind, take a look at your total credit limit vs. outstanding debt. What is your ratio? Understanding your current situation will help you decide how to tackle your debt in the future.


    • Project your spending. While you may not be able to pinpoint your spending each month, review your credit card statements and outline recurring expenses. If your credit utilization ratio is high, try to cut back. Reducing your spending will help you work toward a better ratio.


    • Even things out. Balance is imperative to improving your credit score. Credit bureaus may assess your utilization ratio based on individual cards and their aggregate totals. Therefore, it is important to keep each card’s ratio at 25 percent or less in addition to your total ratio. If possible, distribute spending across your cards to make sure you achieve this goal.


    • Pay off your debt. The simplest but perhaps most difficult way to lower your utilization ratio is to pay off your debt. For example, Jan has an outstanding balance of $5,000 with a $12,000 credit limit. She managed to pay off $3,000, thereby reducing her utilization ratio from 41.6 to 16.6 percent. Attacking your debt is a quick solution, but it may not be plausible for everyone.


    • Increase your credit limit. If paying down debt isn’t an option, contact your creditor and ask them to conservatively increase your credit limit. For example, if Jan increased her total credit limit to $14,000, her initial ratio would be reduced from 41.6 to 35.7 percent. By increasing your credit limit, your utilization ratio will reduce automatically.


    • Set an imaginary limit. A surefire way to improve your credit score is discipline. A $5,000 credit limit does not mean it’s a good idea to go on a spending spree. Instead, give yourself a 25 percent limit (i.e., $1,250) and stick to it. By ignoring your actual credit limit, you ensure responsible spending and an ideal credit improvement strategy.


Depending on your methods, credit utilization can be a help or a hindrance. Try a few of the tips above and work to help yourself.