If you’re trying to keep your credit rating healthy, you may want to minimize your credit utilization ratio. It comprises 30% of various credit scoring models, such as the FICO score.
Since it makes up such a sizable chunk of your credit, it could truly hurt your credit score. In contrast, effectively managing it may pave your way to better financial health.
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What is Credit Utilization
It is the ratio of your credit card balances and your total credit limit. It aids credit bureaus in assessing your financial health as it gauges how much credit card debt you owe.
Excessive accumulation of debt decreases your creditworthiness, a negative impact on credit reporting. Consequently, it’s one of the most crucial aspects that are affecting your credit.
What is Good Credit Utilization
It is highly recommended that you keep your utilization rate below 30%. Going beyond the threshold may negatively affect your credit scores. Good utilization is vital to positive financial health since it may help you handle your finances easier. As a result, your credit rating improves too, helping you access necessary services and goods.
Credit Utilization Ratio
In order to compute for it, you simply must divide the total of your credit balances with your credit limit. For example, if you have a limit of $200 and a balance worth $100, your credit utilization ratio is 50%.
Alternatively, you may access credit calculators online to help with computation. These are usually provided by companies that provide other debt management services.
How to Improve Credit Utilization
Utilization is based on your credit limit and your total balance, so you must adjust these to improve the ratio. Determine how much you owe and jot down the details. Then, you may pay off your balances by earning more money or requesting debt relief.
On the other hand, you may ask your credit card company to increase your limit or to open another credit card account.
Detail Your Debt Balances
As with any problem, you must first understand it completely, so you must first verify how much you owe. Know how much your debts are and how much your credit limit is. Gather all your balance statements from previous billing cycles and jot down the details.
Additionally, search for debt calculators online to facilitate your calculations.
Expand Your Credit Limit
You may ask your credit card issuer to raise your credit limit for a lower utilization rate. However, your lender may decline your request if you have a bad credit rating. Moreover, this action may become futile if you spend excessively afterward.
That’s why you should resist the urge to fill your account with more balances and keep a large amount of total available credit.
Get More Credit Cards
Having more than one credit card spreads your balance on other accounts, so you can lower your total credit utilization. You may alternate among your cards in order to avoid hitting the 30% threshold for each.
However, opening another card will depend on your credit card issuer and your credit rating. Also, you might accumulate more debt due to several interest rates.
Pay At The Right Time
Make sure your balance is low before your current billing cycle ends. Your card issuer sends your account info to the credit bureaus after every cycle. If your payment didn’t reflect on your account before the closing date, it might not be counted when the credit utilization ratio is recalculated.
Check your billing statements in order to determine when your billing cycle will close.
Pay Twice a Month Or More
You are required to pay credit cards once per month, but additional payments may reduce your balances faster. If you don’t have the extra funds, you may take on a side hustle temporarily.
You may ask around the neighborhood for a part-time job, or you may check online for more options. That way, you might earn enough to improve your utilization quicker.
Set Credit Limit Alerts
You may ask your credit card company about their online alert features. Banks and other financial institutions have mobile apps that send notifications when you’re about to reach a certain amount. This will greatly help you maintain healthy spending and credit utilization as they prevent you from unwittingly spending.
Request Debt Relief
If your debt burden is simply insurmountable, you may ask a debt relief company to reduce your unpaid balances, otherwise known as debt settlement. You may consult a company to negotiate with your lenders, and you must refrain from repaying them until an agreement is established. Meanwhile, you must save money in an escrow account in order to pay your reduced debt.
Once negotiations succeed, you must agree to the resulting offer and the settlement company receives compensation in return. Then, the money in your escrow account will be used to pay the new debt amount. Remember that this may inflict short-term harm to your credit report. Nevertheless, it may improve your credit utilization ratio and your long-term finances eventually.
Do It Yourself
You may opt to reduce your debts by yourself with the debt snowball and debt avalanche methods. These involve paying debts one-by-one while keeping current with other balances.
The snowball method involves paying the smallest debt first, while the avalanche pays your largest one initially. Nonetheless, each may facilitate debt payoff that improves credit utilization.
Have Good Money Habits
Most importantly, spend frugally and wisely in order to keep your utilization low. Only buy things you need, and save up for an emergency fund. Though you may still buy the stuff you like, make sure to do so occasionally. Refrain from using credit cards for these, so you’ll only pay with money you truly have.