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What is Credit Utilization and How to Improve It?

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Credit utilization is the percentage of your available credit you're using. It's also one of the most important factors lenders weigh when considering whether to lend you money, how much, and at what interest rate.

Why Lenders Care About Credit Utilization

If you have high revolving credit limits and low balances, creditors take that as a sign that you know how to use credit wisely. If you are borrowing heavily against all your credit cards and revolving lines of credit, that can be a sign that you’re not as financially responsible as you could be—or are under financial strain. Credit utilization is a more significant factor in your credit score than the total amount you owe because it offers lenders insight into how well you manage the credit you have available to you.

Ideally, your total credit utilization rate and the rate for each credit obligation should be below 30 percent.

Calculate Your Credit Utilization

Calculating your credit utilization is easy. Simply divide the amount owed by the amount of credit available.

For example, suppose you have a credit card and a line of credit, each with a limit of $5,000, for a total credit limit of $10,000. Let’s say you owe $1,000 on the line of credit and $2,000 on the credit card, for a total of $3,000 owed. Given this, your credit utilization ratio is 30%.

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How to Improve Your Credit Utilization

You can improve your credit utilization by increasing your available credit, paying down your debt, or rebalancing your debt.

Increase your available credit

  • Ask for a higher credit limit. Ask your lenders to increase your credit limits. Each creditor you approach may initiate a hard credit check, so consider spreading out these requests. You might want to start with a card that has a high utilization rate.

  • Open a new credit account. If your credit score is low, apply for a secured credit card. For example, if you belong to a credit union, you could look into a share-secured loan, which uses your savings account as collateral.

  • Become an authorized user on another person's account. But do this only if that account has low credit utilization. Maybe your spouse has a credit card he doesn't use that often. If you ask your spouse to add you as a joint user to that account, your available credit goes up.

After you obtain additional credit, be sure you don't accumulate more debt on those accounts.

Pay down your debt

Paying off your debt as fast as possible is ideal. You'll save on interest and boost your financial health. Use discretionary income (money you have left after paying bills like your mortgage, utilities, and groceries) to pay a little extra every month. Consider the debt snowball method to gain quick wins and stoke your motivation, the debt avalanche method to minimize interest charges, or the debt snowflake method to capture small savings that add up.

Rebalance your debt

If you don’t have the cash to make extra payments, you can still improve your credit utilization by rebalancing your existing debt:

  • Spread out your spending among different accounts. If one credit card has a high utilization rate, stop using it and start making any new purchases on an account with a low utilization rate.

  • Make payments early in your billing cycle ideally right after you get each month’s statement. Credit utilization is a snapshot, based on what your creditors report to credit bureaus. Stay ahead of that monthly cycle by paying early in each statement period.

  • Use a fixed-term personal loan to pay off revolving debt. When you move your credit card debt to an installment loan, your utilization rate drops immediately for any revolving debt account you pay off. The fixed loan doesn’t count in your credit utilization because it’s not available credit (i.e., you cannot borrow more money without reapplying).

Use Credit Responsibly

You work hard to make payments on time, keep your balances in check, and rein in your spending. It pays to do everything you can to ensure your credit score accurately reflects your responsible use of credit. Managing your credit utilization can not only improve your credit score, but gain you favorable terms if you ever need to borrow again.

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