Credit card debt can be an expensive burden to carry. Consider the average annual percentage rate — the interest rate, plus any fees — of credit cards in the U.S. News database, which ranges from about 15% to 23%.
But credit card debt can cause serious problems beyond money wasted on interest charges. If your cards have high credit utilization rates, this could hurt your credit score — even if you make all of your payments on time.
What Is Credit Utilization and Why Does It Matter?
Your credit utilization rate takes two figures, your credit limit and your current balance, to calculate the percentage of how much of your credit limit you are using.
For example, if you have a credit card account with a $10,000 limit and a $5,000 balance on the card, your credit utilization rate is 50%.
The lower your credit utilization, the more attractive you are to lenders. “A low credit utilization illustrates to lenders that you’re responsible with your credit,” says Leslie Tayne, debt resolution attorney and founder and managing director of Tayne Law Group. “A high credit utilization can hurt your credit score.”
Credit scoring models such as FICO and VantageScore analyze your debt-to-limit ratio when calculating your credit score. With FICO scoring models, credit utilization accounts for 30% of your credit score. So, when you lower your credit card utilization, your credit score might increase.
What Is a Good Credit Card Utilization Rate?
If you want to earn and keep good credit scores, it helps to know what scoring models consider a good credit card utilization rate. The answer to the question, however, depends on the credit scoring model that’s being used and your goals.
VantageScore experts often advise maintaining a credit utilization rate of 30% or lower. Still, a debt-to-limit ratio that’s as close as possible to 0% is best.
Fair Isaac Corp., the creator of the FICO score, also recommends maintaining a low credit card utilization rate — the lower, the better. Are you aiming for an excellent FICO score? According to the company, consumers with scores between 800 and 850 have an average revolving utilization rate of 4% to 5%.
Chad Kusner, president of credit rehabilitation company Credit Repair Resources, provides a good rule of thumb to follow. You want to show that you’re using your credit cards, “but also keeping the lowest possible balance,” he says.
How Can I Lower My Credit Card Utilization?
There are several ways you can lower your credit card utilization rate.
1. Pay down your credit card balances. The simplest way to lower your utilization rate is to pay down your balances. That’s easier said than done.
Debt payoff tactics, like the snowball and the avalanche methods, can help. Budgeting, spending cuts and lifestyle changes may help you move closer to your goal as well. If your credit is in decent shape, a balance transfer credit card or debt consolidation loan might speed up the debt elimination process.
The good news about paying down your credit cards is that you don’t have to reach 0% utilization before your credit score has a chance to improve. As you pay down your debt and lower your credit card utilization in increments, your score may start to increase little by little.
2. Learn your statement closing date. Another tip for lowering your credit card utilization is to learn your account’s statement closing date and pay your balance before then. “The balance we owe on the statement date is what’s reported to the credit reporting agencies,” says Kusner.
You might charge $5,000 on your credit card account throughout the month. But if you pay off that balance before the statement closing date, your credit report will show a zero balance. That’s a 0% credit utilization rate.
3. Don’t add to credit card balances. “Avoid spending more than you can pay off at the end of the month” if you’re trying to lower your credit card utilization, says Tayne.
Worried about temptation? Consider locking your credit card away in a safe place instead of carrying it in your wallet. You can also implement a 24-hour rule, taking 24 hours to think over unplanned purchases.
Just be careful not to close credit card accounts in an attempt to curb your spending habits. Closing a credit card will raise your overall credit utilization rate and might harm your credit score.
4. Ask for a credit limit increase. Increasing the gap between your credit card balance and your limit lowers your utilization rate. Aside from paying down your balance, the other way to gain distance between these two figures is with a credit limit increase.
Let’s say you have a credit card with a $10,000 limit and a $5,000 balance. Your credit utilization rate is 50%. If you increase your limit to $15,000, your utilization rate would fall to 33%, even though the balance remains the same.
Asking your credit card company for a limit increase can help you to keep your utilization rate within reason, Tayne says. A higher limit may prevent a hit to your credit score if you need to make a large purchase you can’t pay off immediately. But Tayne cautions consumers not to go overboard with their spending, even if a request for a higher credit limit is approved.
5. Become an authorized user. An out-of-the-box way to lower your overall credit card utilization requires a favor. If a friend or family member adds you on the right credit card as an authorized user, your credit score might benefit.
“You could have someone add you as an authorized user on a credit card account that has a low balance and a high limit and a great pay history,” says Kusner. “Now your aggregate or overall utilization will be lower.”
Of course, Kusner maintains that paying your credit cards on time is an essential element to earning a good credit score. He also encourages consumers to use credit cards responsibly and not charge more than they can afford.
How Much Will Lowering Credit Utilization Affect My Score?
In credit scoring, specific actions don’t have exact point values. Reducing your credit utilization rate by 10% won’t raise your credit score by 10 points (or any other guaranteed number, for that matter). That’s not how credit scoring works.
Everyone’s credit, Kusner says, has a unique DNA. The same action, like paying off a credit card, can influence individual credit scores differently. It depends on your profile how much lowering your credit card utilization rate has on your credit score.
If your utilization rate is already less than 30%, you might not see much of an improvement from paying off a credit card. But if you’ve been hovering at or near your credit limit, you should see a larger positive shift by improving your credit utilization.
You should expect at least some benefit to lowering your credit utilization, even though there’s no guarantee of how much you can improve your credit score. Remember, this factor is second only to payment history when it comes to calculating scores, so improving your credit utilization rate can make a big difference.
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