How to Improve Your Credit Utilization Rate
Your credit utilization rate represents the amount of credit you have in comparison to the amount you’re currently using.
April 21, 2021
There are a few factors that determine your credit score. To boost your credit score, you can address all of them, but today we want to narrow in on a particular — and very important — element of your credit score and how you can improve it. But first, what is a credit utilization rate? Your credit utilization rate represents the amount of credit you have in comparison to the amount you’re currently using and accounts for 30% of your overall credit score.
What is the best credit utilization rate? Ideally, you’ll want your credit utilization rate to be under 30%, and the lower your score the better. That’s because lenders view using a small amount of your available credit as a sign that you’re financially responsible and can manage your credit responsibilities. If your rate is on the higher side, they’re more likely to worry that you’re struggling with your finances and won’t be able to make your credit payments on time. To find out what your credit utilization rate is, divide your total credit balances by your credit limits.
Because your credit utilization rate is such an important factor of your credit score — which can impact your financial life in many different ways — let’s take a look at how you can improve your utilization rate.
Paying Off Your Balances
One easy way to quickly lower your credit utilization percentage is to pay off any of your revolving credit balances. Only revolving credit, like credit cards, affects your credit utilization rate.
If you pay off the entire balance on a revolving credit account, you’ll help keep your ratio low, which in turn can improve your credit score. If possible, not carrying a balance on a credit card, one of the most common forms of revolving credit, is a good way to keep your credit utilization rate low.
Reconsider Closing Your Credit Accounts
If you’re not using a credit card or another type of revolving credit, like a personal line of credit, you may be tempted to close those accounts. While that seems like a good idea at first glance, closing credit accounts can actually hurt your credit utilization rate. This is because if you continue to hold a balance on the credit accounts that you do use, you'll now be using a higher percentage of your overall credit limit since you closed a credit account that was available to you. If you are carrying a balance on any of your credit accounts, you automatically increase your utilization rate when you lower your available credit.
If you do decide to close a credit account, perhaps because you’re being charged an annual fee to keep the account open, adjusting how you’re using your remaining credit will affect your credit utilization rate. Paying down the debt on those accounts or spending less on them can help bring your credit utilization rate back down.
If you choose to keep an unused account open, keep an eye on the account for any suspicious activity and contact the card issuer as soon as you see anything.
If you’re worried the card issuer will close your account because you aren’t using the card — you may not be notified of a closure due to inactivity — you can make the occasional small purchase or put a recurring subscription service charge (like Netflix) on that credit card and pay it off right away. Checking your card's terms and conditions for this information or calling the card's customer service phone number are both good ways to find out the card issuer's policy on inactivity.
Opening New Credit Accounts if the Time is Right
Opening a new credit account can help your credit utilization rate, as you’ll gain more access to credit, but it can also negatively affect your credit score temporarily. If too many creditors make inquiries on your credit report in a short period of time, which can happen when applying for new credit, your credit score can be negatively impacted. This isn’t a major hit to your credit and these inquiries generally don't affect your credit for more than a year, sometimes less. So if you won’t need to make any major financial moves in the near future that require a good credit score (like applying for a mortgage), then opening new credit accounts shouldn't be a cause for worry as long as you're confident about your ability to pay the debt back on time.
Increasing Your Credit Limits
One way to increase your available credit without opening a new account is asking your lender for a credit limit increase. Before you make the official request, find out if the lender will pull your credit with a hard inquiry when determining if you’ll qualify for a credit increase. Then you can decide if a hard inquiry is worth it to you or not. In some cases, credit card issuers automatically increase limits for a borrower if they’ve made their payments on time and keep their balances low, but you always have the option of being proactive with the request.
Using Your Credit Card Less or Making Payments in Full
One of the best ways to achieve a good credit card utilization rate is to pay any credit card balances in full each month. Even if you can’t pay in full, it's recommended to keep the balances as low as possible. You can also use your credit card less often and pay for your purchases in cash or with a debit card to avoid making your balance grow.
If you do make purchases using your credit card, which can be beneficial to you if you have a credit card that offers rewards, paying your balance before the end of your billing period will ensure that your zero balance or low balance is what is reported to the credit bureaus.
Is credit card debt weighing your credit card utilization and credit score down? Learn how Tally can help you consolidate your credit debt and pay down your debt faster.