Credit Cards » Credit Card Guides » How to Lower Your Credit Utilization Rate
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How to Lower Your Credit Utilization Rate

If you’re looking to really improve your credit score and make it the best that you can you want to keep that utilization at a good level. Here are 9 ways to lower your utilization ratio.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

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Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: January 1, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

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Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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This chart created with Experian data shows that those with an average to good credit score have an average credit utilization ratio of the optimum 33%. This ratio drops significantly for those with very good and excellent scores.

At the other end of the scale, the chart shows that those with poor credit scores typically have a very high credit utilization ratio, with an average of 73%. This will be a massive factor in lending decisions for those in this group.

 

Key Takeaways

  • The Credit utilization ratio represents the ratio between the sum of balances on credit accounts and the total amount of credit available to you through those credit accounts.
  • The first and most obvious way to lower your credit utilization ratio is to simply pay down some of the debt. As the credit utilization ratio falls it can lead to an improvement in the credit score.
  • Another way to reduce the credit utilization rate is by applying for a new credit card or applying for a credit limit increase. In both cases, if the application gets approved, the total amount of credit available to you will increase, leading to a fall in the credit utilization ratio.
  • Most financial experts and credit rating agencies advise consumers to keep their credit utilization rate at or below 30%. 

What is the Credit Utilization Ratio?

The amount of money that you currently have as a balance on your credit accounts as compared to the amount of money that you have available to you through those credit accounts is your utilization.

That means if you have $1,000 of available credit and you’ve spent $500 then your credit utilization is 50%. Unfortunately, the higher the utilization the lower your credit score can be. That’s why it’s generally recommended to keep the number under 30%.

If you’re looking to really improve your credit score and make it the best that you can you want to keep that utilization at a good level. That’s because if your utilization is high it looks like you’re spending a whole lot of money on debt and that looks like you’re not going to make your payments.

What this means is if you’re applying for anything new you could end up denied entirely. And if you do manage to get approved you could end up paying some of the highest interest rates because you’re considered higher risk than others.

How to Calculate Your Utilization Ratio?

Now, the good news is that it’s not difficult to figure out your credit utilization rate. You just need to take a look at your credit card statements or online account to find out how much of a credit limit you have and how much of a balance you have.

You can even call the customer service number and get completely up-to-date records of how much you’ve charged versus how much total you have available.

To make it simple, let’s look at three credit cards with different credit limits.

Let’s say that you have a $5,000 limit on your first card but you’ve spent $2,000. On your second card you have a limit of $10,000 and you’ve spent $3,000 and on the third card you have a $6,000 limit and spent $1,000. Your total credit utilization rates would look like this:

 BalanceLimitUtilization Ratio
Card 1$2,000$5,00040%
Card 2$3,000$10,00030%
Card 3$1,000$6,00016.6%
Total$6,000$21,00028.5%

Overall you have credit utilization of $6,000 and approximately 28.5%.

Now, keep in mind that this is only an approximation of what the credit report you have is looking at. That’s because they look at the last balance that your credit card companies (or other credit issuing companies) reported to them.

So you may have a higher or lower utilization rate because of those differences in reporting.

How to Keep Credit Utilization Low?

There are good ways to lower your utilization ratio, each has its own pros & cons – here are the main strategies:

1. Decrease Debt

One way that you can bring down the balance on your cards and your overall utilization is by paying down your debt as quickly as possible. You want to make additional payments each month or pay a little bit extra. Consider making two or more credit card payments per month — even minor extra payments will help you pay off your debt faster and keep your utilization ratio low throughout the billing cycle.

This is going to make it easier to pay off that debt sooner and it’s going to bring down your utilization rate even more during a single payment cycle. You just need to make sure you’re only paying down and not charging more.

2. Get a New Card

It may seem counterintuitive to apply for a new card when you’re trying to lower your debt but it’s actually a good idea. You just want to make sure that you’re not actually using the new credit card. Because it depends on the issuer's examination of various variables, including as your income and credit history, you won't know what your credit limit will be until after you've been accepted. You’re going to have a little bit of a hit on your credit report because of that new card, but you’re also going to increase your available credit while maintaining your current balances.

This decreases your credit utilization. Just make sure that you’re not going to be tempted to use that new credit card or you could actually find yourself in even more trouble in the long run.

3. Increase Your Limits

If you can get your credit company to increase the limits on the cards that you already have it can also decrease your utilization.

A card that has a limit of $6,000 and you’ve spent $2,000 means a utilization rate of 33%. On the other hand, if you can get a limit increase to $10,000 you change that dramatically. Now that same $2,000 is only 20% of your total available credit. Just like that you could actually be getting a huge difference and a huge benefit to your overall credit score because you’ve just lowered your credit utilization.

The lender will most likely base its choice on your card's usage and payment history, so if you've had a history of late payments, you're unlikely to get a limit rise. Even if the issuer denies your request, requesting a credit limit increase can result in a hard inquiry. The query may have a minor influence on your credit, depending on the rest of your credit, but the impact can vary significantly depending on the rest of your credit.

This chart created with Experian data, highlights the significant increase in the average credit card limits in the last decade. Credit card limits have consistently increased with an overall increase in the recent 10 years.

 

4. Know When You’re Being Reported

Your credit card company may report immediately before your payments are due or several days or even a week or more. That means you want to make sure that you’re paying attention to these dates and making a payment quickly before the company reports to the bureaus.

If you make your payments before this time you’re going to get a lower credit utilization score. If you’re waiting to make the payment until the bill is due it could mean that your credit company is reporting a higher amount and that drops your score.

You want to make sure that you’re looking at the reports that you get and statements that you get from your credit company to make sure you know when you need to get a payment in by. You can also call up the customer service line and find out when they’re making those reports. That’s going to give you a chance at an increase on your score as well.

5. Know Your Spending and Set up Balance Alerts

You want to make sure that you’re not spending too much on your credit cards and one way you can make sure of that is to actually make sure your credit card is telling you when you’re spending too much. Keep watching the numbers yourself and stop spending when you get too close to 30%.

You may want to take a look at the online monitoring services available for your credit card and also at the alerts that you can sign up for. Set them to warn you when you get close to 30% utilization on each card.

6. Lower Your Interest Rate

If you can cut down your interest rate it’s going to increase the speed at which you can pay off your cards because you’re going to be paying more toward the principal. You will need to talk to the issuer of your credit card to make this happen and you’ll likely need a good record.

7. Don’t Close Out the Card

If at all possible you want to make sure you keep your cards open. If you have a wider range of different types of credit it looks better for your credit score. And that lower credit utilization rate is definitely going to help matters as well. So make sure you’re keeping accounts open.

If you close an account you’re actually going to increase your credit utilization because you now have less available credit. That’s going to decrease your credit score over time.

Think about it this way:

Let’s say you have a credit card with a limit of $2,000 and you’ve spent $750. The second card has a limit of $3,000 and you’ve spent $500. That’s actually not too bad because your utilization rate is actually 25%. But you’ve decided you don’t need two cards so you get rid of one card and pay off the amount due. Now you have a limit of $2,000 and a total amount owed of $750. It doesn’t seem bad, but your utilization is now 37.5% and that’s not good.

When you’re considering closing out a card make sure you’re thinking about this and that you’re not closing a card that you need to keep your ratios looking good. You could end up with problems on your credit score because you think you’re doing something that will help you out in the long run.

8. Increase Your Payments

Can you make a second payment during the month?

Generally making an extra payment is going to increase your score and it could mean that you’re getting that payment in before your credit company is reporting to the credit bureau. That’s definitely going to be an important distinction, don’t you think?

9. Consider a Personal Loan

If you’re really looking at your credit utilization rate you may also want to look at a personal loan. These could pay off your credit card and it could help you improve the types of credit and the credit mix that you’re showing to potential lenders.

Combining numerous credit card balances into a single (preferably lower interest rate) loan will minimize the amount of interest you pay over time, allowing you to put more money toward principal and pay off the debt sooner. Also, many consumers find it easier to keep track of one monthly loan payment rather than several credit card installments. Finally, your credit usage ratio decreases if you keep your credit cards active after shifting the debt to a personal loan. Keeping the credit cards open and not running up a balance on them will enhance your credit score over time.

You will need to pay attention to the negative sides though, like paying fees to get the money in the first place or getting approved in the first place. Plus, the people who get the best interest rates are going to have the best credit scores. If your credit score isn’t that great you could find yourself in some trouble that way.

What Else You Can Do To Improve Your Credit?

Payment history, quantities outstanding, length of credit history, and other criteria all contribute to your credit score. While there is no quick fix for a poor credit score in many circumstances, there are things you can do right now to start raising your score.

Here are a few things to help you get started:

  • Make On-Time Payments — Missed or late payments will almost surely hurt your chances of getting authorized. This includes not only loan payments, but also all other bills. Don't worry, your lender will look into it. Additionally, because you've previously completed the first step, you're aware that this will lower your overall credit score.
  • Pay down your revolving credit card bills – if you have the cash, you should pay more than the minimum payment each month. Working on your revolving debt can help you keep your credit utilization rate low, which will help you boost your credit score. It's best if you can pay off your debt as promptly as possible each month. You can also make many payments against your debt each month to keep your balance low and make it easier to budget.
  • Don't apply to multiple cards/loans –While you may need to open accounts to improve your credit score, you should aim to keep your credit applications to a minimum. Each application can result in a hard inquiry, which can reduce your credit scores marginally. However, inquiries can accumulate and compound. The average age of your existing accounts is reduced when you open a new account, which can impact your credit scores.
  • Review your credit report – you are entitled to one free credit report per year from each of the three credit reporting agencies, and obtaining one has no bearing on your credit score. Make a comprehensive examination of each report. You should contest any inaccuracies you find. This is the closest thing you can come to a rapid credit repair. According to official statistics, 26% of customers make at least one potentially serious blunder. Some are simple mistakes, such as misspelled names, incorrect addresses, or accounts owned by someone with the same name.

According to Experian data, the average credit score for United States residents was 714 across all age groups. In the table below you can see a breakdown per age:

 


Bottom Line

Basically you want to take a closer look at your credit utilization and see what it’s saying about you. It’s a great aspect of your overall credit score because it’s actually something you have a lot of control over, and that’s going to help you improve your score.

For those who can’t pay off all of their debt at once, it’s okay. You can make a really big difference by paying off some of the debt and at least lowering the overall debt to credit ratio. That’s going to help you increase your credit score and if there is a reason that you need to get a credit of any kind it’s going to help you out with the process. You may have better luck getting approved.

FAQs

If you pay off your credit cards in full on time each month, you may assume that your credit utilization is 0%. However, this is not the case. The amount owed figure is based on the amount the credit card issuer reports to each credit issuer. It is highly unlikely the issuer will send the data on the precise date when the balance is brought down to $0 by your payment.

Therefore, if you are trying to keep your credit utilization rate as low as possible, try not to max out your cards during the month even if you intend to pay the balance in full when you get the bill.

Credit card companies usually update the account balance information every 30 days. This usually occurs at the end of your billing cycle, so your credit utilization rate will be recalculated every month.

So, if you have a higher credit utilization rate, this will be offset when a new, lower balance is reported to the credit bureaus. 

While your credit report will detail a history of your payments, inquiries and other financial data, there is no historic list of your credit utilization. This means that credit utilization does not have memory. So, if you do want to build your credit and intend to apply for a new financial product, bringing your credit utilization down over a period of several months will be beneficial.

No, in fact, it can actually be beneficial to pay off your credit card early. Paying off the balance before the statement closes, you may lower your interest payment and could increase your credit score. The reason for this is that if you pay early, you may have a lower average daily balance and lower credit utilization.

So, if you are planning on making a large payment on your card, you may find it beneficial to make a payment mid month or pay off the balance early to minimize interest costs and not impact your credit utilization.

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Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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