What Does It Mean When Your Credit Usage Decreases?

Recent statistics show that Americans paid down a record $83 billion in credit card debt in 2020. Doing so likely had a broad impact. Not only did it allow consumers to save money on compounding interest, but it also likely helped improve their credit scores and history. 

One of the reasons credit scores would have been impacted is because the borrower's credit usage decreased. 

So, what does it mean when your credit usage decreased? We're here today to provide the answer. We’ll also cover what credit usage is, why it is important, and the things you can do to keep lowering your usage rate. 

What is credit usage? 

Your credit usage rate is a measure of how much of your total available credit you are using. The credit usage rate is also commonly known as the credit utilization ratio. 

This rate measures the usage of your revolving credit. Revolving credit is any type of credit in which you can borrow repeatedly up to a certain dollar amount, otherwise known as your credit limit. Revolving credit includes any credit cards and line of credit you have. 

To calculate your overall credit utilization rate, combine the maximum limits for your open revolving credit accounts. For instance, let's say that you have one credit card account with a max of $2,500 and another with a credit card limit of $5,000. You also have a line of credit available up to $7,500. If you add these together, you discover that your total credit limit is $15,000. 

To determine your total credit usage, you need to then add up your balances. Let's say one credit card balance is $500, and the other is $3,500. Additionally, you have an outstanding balance of $1,000 on your line of credit. If you add these together, you find your total outstanding balances equal $5,000. 

Divide your outstanding balances by your total available credit to determine your credit usage. So, $5,000 divided by $15,000 (then multiplied by 100 to yield a percentage) is 33%. 

Why is credit usage important? 

Credit usage is important because it helps you establish a good credit report. When you have a balance, your credit card issuer and other lenders will report it to the three credit bureaus after one billing cycle has passed. The three credit bureaus are: 

1. Experian™

2. Equifax™

3. TransUnion® 

At this point, the information is a part of your credit history. It is then used to determine your credit score. There are two types of credit scores: FICO® Score and VantageScore. Both consider credit usage to be an incredibly important factor when determining your score. 

FICO says that the amounts you owe account for 30% of your credit score. VantageScore doesn't quite define the weighted percentage, but it does indicate that your total credit usage, balance, and available credit is the most important factor in determining your score. 

In summary, your credit usage is important because of how influential it is on credit scoring models. Your credit score is critical for future lending, as it helps lenders determine whether they should loan you money and, if so, the interest rate at which they should do it. 

What does it mean when your credit usage decreased? 

If your credit usage rate decreases, it means that you've been paying off a higher portion of your credit card bill than spending. This is excellent for your personal finances. Paying down high-interest credit card debt can help save you money in the long run since you are avoiding the effects of compounding interest. 

Additionally, keeping a low credit utilization rate can be useful if you are looking to build credit — or maintain it, if you already have excellent credit. The rule of thumb is that you should keep your credit utilization rate below 30%. However, the lower it is the better, though you don’t necessarily want the rate to be 0% either. 

If your credit usage rate is 0%, you jeopardize your credit card company or lender closing your account. Ideally, you should aim to keep your credit usage rate in the single digits. 

In the example above, you had $15,000 in available credit. Ideally, your total revolving credit balances would be less than $1,500. This would demonstrate fiscal responsibility to lenders.

What can you do to keep decreasing your credit usage rate? 

Avoiding a high credit utilization rate is a good financial habit to get into. There are a couple of things that you can do to help. 

First and foremost, aim to keep paying down debt. As stated, paying down debt will help you save money in the long run on interest, therefore making it easier to meet your financial goals. 

If you are looking for ways to pay down debt or reduce your credit usage, you might consider: 

• Balance transfer cards

• Personal loans for debt consolidation

• A credit card payoff app like Tally 

• Requesting a credit limit increase 

A balance transfer card allows you to transfer your existing balances to a card with a lower interest rate. Sometimes the rate is as low as 0% for the promo period. Be mindful that a balance transfer card is technically a new credit card and will require a hard inquiry from a lender, which could reduce your credit score temporarily.

Debt consolidation loans allow you to borrow money to pay down your existing debts. You use the loan to pay off your credit card balances and then make your monthly payments on the loan instead. Debt consolidation loans usually have a lower interest rate than credit cards. 

There are also credit card payoff apps available to help. Tally is one such example. Tally automatically pays your balances each month, with a low-interest line of credit, in the quickest and most efficient way possible. You will no longer have to worry about due dates and on-time payments, as Tally manages this for you. 

One last option you have is to request a credit limit increase. This is typically reserved for the best credit card users — those who have a history of making timely payments and paying their balance in full. 

By asking for an increase, your lender is giving you more borrowing power. This, in turn, increases your total available credit and reduces your credit utilization rate. Some lenders will be willing to negotiate if you can make a strong case. Additionally, some credit card companies allow you to request an increase online or in their mobile app by answering a few questions and providing your annual income. 

Keep paying off debt to help lower your credit usage rate

If you're someone who borrows money from a lender, it's important that you understand the financial implications of doing so.

A decrease in credit usage is a very good thing. It shows that you are paying down debt and existing balances and that you are a responsible cardholder. These habits can help build your credit score. 

If you are looking to reduce your credit utilization rate, consider using tools like a balance transfer card or a debt consolidation loan. You can also look into using Tally1, a credit card payoff app that offers a low-interest line of credit and streamlines how you pay down your existing balances.

¹To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate.