What is Your Credit Utilization Ratio?

What is a good credit utilization ratio?

We’ve established that it’s best to have a low credit utilization ratio, but how low is low enough? Experts like the Office of Financial Readiness suggest a credit utilization ratio of 1-10%.

But you may not want to go too low; a 0% credit ratio may help your credit score if you’re actively using your card, but a 0% ratio from inactive credit use may not. Part of building a good credit history is showing you can borrow and repay your debt. That means using your credit and managing it responsibly.

How can you improve your credit utilization ratio?

If your credit utilization ratio is hurting your credit score, there are steps you may take to help lower it. Take note of these options:

• Pay down debt: Paying your debt is one of the best ways to lower your credit utilization ratio. But because your lenders report your balances at the end of your billing cycle, the timing of your payments may impact how quickly you see improvement to your credit score. Consider making payments to your balances before the close of your billing cycle. And if you make payments after receiving your statements, try to pay more than the minimum required. Once you pay down your debt, you’ll need to maintain low balances to sustain your ratio.
• Monitor spending: Keeping tabs on how much you’re charging may go a long way in helping you lower your credit utilization. If your credit card company has a mobile app, you may be able to set spending alerts that notify you when you’ve reached a certain credit card balance. And managing your spending may help you manage payments, too.
• Request a higher credit limit: Increasing your total available credit may help lower your utilization ratio. So it may help to request a credit limit increase from your credit card issuer. They’ll look at your:
  • Monthly income and expenses
  • Length of credit history
  • Payment history
  • Current credit utilization percentage

However, your request might not get approved, and a credit limit increase only works if you keep your balance proportionately low.

• Open a new revolving credit account: Another way to increase your available credit is by opening a new credit card or personal line of credit. But you’ll still need to keep your balances low to manage your debt compared to your total available credit. And while opening a new account may increase your total credit, applying for too many new accounts within a short time may hurt your credit score.
• Make a balance transfer: You may raise your total credit limit by moving your debt to a new card. If you move high-interest balances to a single card, you may free up the available credit on your other accounts (as long as you don’t close them). It will also provide a new line of credit. Additionally, some new credit cards offer a low to 0% introductory interest rate on balance transfers, which may help you pay your debt more quickly by avoiding costly interest charges.
• Monitor your credit report: The Federal Trade Commission (FTC) reports that consumers can now request one free credit report per week.

You can request your free credit report at AnnualCreditReport.com (the only website authorized by the federal government). Additionally, you may ask for a free credit report within 60 days of being denied credit.

The bottom line

Credit utilization ratio is one of the major component for calculating credit scores. Understanding how credit utilization works, including how to calculate your rate, may help you manage your score and inform better financial decisions moving forward.