Credit Utilization Ratio: The Best One To Go

Credit Utilization Ratio

The credit utilization ratio, also known as utilization rate, is a number that indicates the percentage of the available balance that borrowers use on their revolving credit accounts, i.e., credit or debit cards. In reality, the lower credit utilization rate is better for your credit rating, but a little utilization is better than not using it at all. So, the best possible credit utilization ratio or rate for revolving credit is 1%. However, you don’t require a 1% usage ratio to have an outstanding credit rating.

How Much Credit Should I Use to Have a Good Rating

If you struggle to have an excellent credit rating, a debt utilization percentage in the single digits would be the best option. For example, if your credit limit on all credit cards is $ 10,000, maintaining your total credit card usage below $ 1,000 will be more suitable for your reputation.

The credit utilization ratio is an essential factor in determining your credit scores among other credit rating models. Therefore, many credit ratings only consider your current balance and credit limit on the bank records; it’s a snapshot of your financial status when calculating your score.

A high credit utilization ratio over a month can hurt your credit report, but when you pay down your charges and your card issuer posts an updated balance to the credit bureaus, your credit usage will decrease as well. Hence, you can quickly notice the improvement in your account history. 

Also, remember credit card issuers usually report your account balance by the end of the billing period. Consequently, you can have a high credit utilization ratio or rate even if you pay down your charges in full. Since the bill typically isn’t due for about 21-25 days after they are received. 

How to Drop Your Credit Utilization Ratio

The credit utilization ratio is calculated using your current credit limits and balance, which means that you can lower the utilization rate by specifying how to increase the available credit or check your recorded balance.

Pay Down Bank Card Balances 

If you have an additional balance, do your best to pay off your credit card bills. You can also limit the use of credit cards to reduce new debt on the account balance.

Request a Credit Line Increase

You can ask your credit unions to increase your credit limit. The card issuers do not have to say yes, and they may not respond if you just opened a card or did not manage your account responsibly. However, it’s worth asking, especially if you haven’t missed any installments, typically paid more than the minimum amount owed, and won’t take advantage of that increase to recover your balance. 

Moreover, update your salary information as it increases. Your credit unions may proactively raise your card limit as your pay increases. Or they might be more likely to agree if you ask for an increase in your credit limit.

Opening a New Credit Card 

Opening a new credit card will also improve your total available credit. This might not be a genuine reason to open a new account. Therefore, opening a new credit card can impact your credit ratings in multiple ways. Although, having several credit cards can make it easier to maintain a lower credit utilization ratio than owning one card.

Keeping your Credit Card Open 

Even if you stop using your accounts, keeping your credit card open will increase the amount of available credit, thus, contributing to a lower credit utilization ratio. If an annual fee is charged against your credit cards— it may not be worth maintaining unless you benefit from accounts in other ways. But instead of closing your account, you can call the issuer and ask if you can switch to another card provided by the issuer without yearly charges.

Use Loans to Combine Credit Card Debt

The credit utilization ratio factor only considers the balance and limits for revolving credit accounts: credit cards and lines of credit. If you use a private loan to pay down your credit card balance, you will transfer funds from the revolving account to an installment account. The principal motivation for combining credit card debts is to lower the borrowers’ monthly payments or interest rates. And now you learn how the consolidation of credit card debt would help with your credit score.

Related Posts: