6 Ways To Lower Your Credit Card Utilization

Your credit utilization rate, the amount of available credit you use at any given time, is one of the most important factors in determining your credit scores. Here are ways you can lower it.

You’ve heard you should keep your credit card utilization under 30%. Here’s why it’s important and how you could do it.

Your credit utilization— the percentage of your credit limit that you’re using—is one of the most important factors in determining your credit scores. Because a high utilization rate could indicate you’ll have trouble paying your bills on time, a lower utilization rate is generally best for your credit scores.

There are several ways to change your balance or available credit. This can help you improve your credit utilization rate and your credit as a result.

1. Pay down your balance early.

2. Decrease your spending.

3. Pay off your credit card balances with a personal loan.

4. Increase your credit limit.

5. Open a new credit card.

6. Don’t close unused cards.

Credit card utilization rates (also known as credit utilization ratios) are relatively simple to calculate. First, look for the credit limit on your credit card account. Then divide the balance on your monthly statement by your credit limit, and that’s your credit utilization rate.

So, if you have a $5,000 credit limit and spend $1,000 during your billing period, your credit utilization rate will be 20% ($1,000 divided by $5,000 – multiply that number by 100 get the percentage.)

If you have several credit cards, you can combine the balances and divide that number by the combined credit limits to find your overall credit utilization rate.

Lowering your credit utilization rate could be a great way to boost your credit.

Unlike some other credit score factors, “utilization is a powerful tool for improving your credit in a short time frame,” says Sarah Davies, senior vice president of analytics, research and product management at VantageScore.

It can take months or years for your scores to recover after a late payment or bankruptcy. However, “if you could pay down all your credit cards in one month, your credit could improve dramatically,” Davies says.

Whether you’re looking for a quick boost or want to learn how to sustain good credit, here are six ways to lower your credit utilization rate.

1. Pay down your balance early.

One tricky point about credit card utilization rates is that your usage depends on the balance that your card’s issuer reports to the credit bureaus, not how much you spend each month. Those two numbers aren’t always the same.

Also, your issuer may not even report to all three of the major credit bureaus, Equifax®, Experian® and TransUnion® — and in some cases, it may not report to any of them.

Typically, issuers report the balance at the end of your billing cycle.

However, some issuers may send the data at the same time each month for all cardholders, regardless of when your billing cycle ends. Your best bet may be to ask your issuer so you can be certain.

What this means is that your issuer may report your billing cycle’s balance before you pay it off. This reported balance will add to your credit utilization.

However, if you pay down part, or all, of your balance before issuers report your balance for the billing cycle, your credit utilization rate for that card will go down.

2. Decrease your spending.

If you’re working to pay down credit card debts and can’t afford to make partial or full payments early, it can be helpful to stop using your credit cards to make purchases. Otherwise, your new purchases may offset your payments, and your credit utilization rate won’t go down.

Switch to a debit card or cash for your regular purchases, and as you make credit card payments to pay off debt, your credit utilization rate could drop.

3. Pay off your credit card balances with a personal loan.

Because credit utilization rates are a reflection of how you use revolving credit, you could take out a personal loan, pay off your credit cards and effectively move the debt to an installment loan (potentially with a lower interest rate than your credit cards). 

Common Question:

What is an installment loan?

An installment loan is a loan that you repay with a set number of scheduled payments over time. Types of installment loans include auto loans, mortgages and personal loans.

However, there are multiple drawbacks to this approach. You’ll need to qualify for the loan and may have to pay an origination fee on the money you borrow.

And to qualify for the best interest rates on a personal loan, you need to have excellent credit (in addition to other factors). If you have average or poor credit, the interest rate on the personal loan may be higher or lower than that on your credit card(s).

4. Increase your credit limit.

Another way to improve your credit utilization rate is to increase your credit limit.

You can call your credit card’s issuer to request a credit limit increase, or you may be able to make the request online. Your card’s issuer may have criteria you need to meet, such as having your account for a specific period of time.

The lender will likely also base its decision on your usage and payment history with the card – so if you have a history of late payments, you’re unlikely to be approved for a limit increase.

Requesting a credit limit increase can result in a hard inquiry, even if the issuer doesn’t approve your request. The inquiry could ding your credit slightly depending on the rest of your credit, although this impact can vary widely depending on the rest of your credit. For example, if you have little credit history, a hard inquiry may impact you more.

5. Open a new credit card.

Another way to increase your available credit is to open a new credit card.

You won’t necessarily know what the credit limit will be until after you’re approved because it depends on the issuer’s consideration of multiple factors, such as your income and credit history. Some cards may have a minimum credit limit.

For example, some Visa Signature® and World Elite Mastercard® cards have a minimum $5,000 credit limit. But even with these types of cards the minimum limit can depend on the card or issuer and you won’t necessarily get a high credit limit.

As with requesting a credit limit increase, applying for a new card generally results in a hard inquiry regardless if the issuer approves your application.

6. Don’t close unused cards. 

As you take steps to get your credit in order, you may want to clear out financial clutter by closing credit cards that you don’t often use.

While this could make managing your wallet easier, closing an account can also lower your available total credit and increase your credit utilization rate.

Managing your credit utilization rate can be a simple way to help improve and maintain your credit. Focus on both parts of the equation — your balance and your credit limit — and look for ways to decrease and maintain a low ratio for the best possible impact.

While recovering from a late payment or another derogatory mark can take months or years, lowering your credit utilization rate could result in a quick, significant improvement in your credit.

Does Checking Your Own Credit Score Hurt Your Credit Score?

Credit can be a confusing concept. But if you want to understand your credit scores, you can start by focusing on high-impact factors like your credit card utilization, payment history and any derogatory marks on your reports.

According to TransUnion’s July 2017 credit literacy survey, a lot of people think so. Of the 1,002 U.S. consumers included in the survey, nearly half thought that checking your own credit scores has the same effect as when a lender checks them.

Fortunately, this isn’t the case. As many know, checking your credit scores on Credit Karma is reported as a soft inquiry and it won’t negatively impact them.

But that got us thinking: What other questions or misconceptions do people have about credit? The factors that actually make up a credit score may be a lot different from what you think.

Let’s dig a bit deeper.

What’s in a credit score?

Below are the factors that are typically used to calculate your credit scores, by the level of impact they can have on your scores. Because there are different credit scoring models, how factors are weighted can vary slightly from model to model.

High impact

Credit card utilization: This refers to how much of your available credit you’re using at any given time. It’s determined by dividing your total credit card balances by your total credit card limits.

Most experts recommend keeping your overall credit card utilization below 30 percent. Why? Because lower credit utilization rates suggest to creditors that you can use credit responsibly without relying too much on it. Individuals whose credit card utilization soars above 30 percent may be more likely to fail to repay their loans than those who keep their balances low.

Another benefit of keeping your utilization low? Having available credit can help if something unexpected arises which you then have to pay for.

Payment history: This is represented as a percentage showing how often you’ve made on-time payments. Paying bills on time shows lenders and creditors that you’re reliable and more likely to pay back your debts.

Late or missed payments can significantly harm your credit scores, so it’s important to try to pay all your bills on time.

Derogatory marks: As of July 1, 2017, about half of all tax liens and nearly all civil judgments have been removed from consumers’ credit reports. That’s good news, because having those derogatory marks on your reports can lower your credit scores. Other derogatory marks that may affect your credit include accounts in collections, bankruptcies and foreclosures.

Medium impact

Age of credit history: This factor shows how long you’ve been managing credit. It doesn’t refer to — as some may think — your actual age.

While your average age of accounts isn’t typically the most important factor used to calculate your credit scores, it’s important to think about. Closing your oldest credit card account, for example, could end up negatively impacting your scores.

To sum up: The longer you manage your credit responsibly, the more you demonstrate your creditworthiness to lenders.

Low impact

Total accounts: This refers to the number of credit cards, loans, mortgages and other lines of credit you have.

Lenders generally like to see that you have used a mix of accounts on your credit responsibly. It generally shows that other lenders have trusted you with credit.

Hard inquiries: Hard inquiries usually occur when you apply for a new line of credit, such as a loan, credit card or mortgage, but can also take place when, for example, you rent an apartment.

A lot of hard inquiries on your credit reports within a short time period may suggest that you’re desperate for credit or aren’t getting approved by other lenders.

Hard inquiries can slightly lower your credit scores. It might seem counterintuitive: To build your credit, you need lines of credit — so why should your credit scores take a hit because you applied for a new account?

Some experts say that any time you take on a new credit obligation, there’s an element of risk involved. Credit models see that and want to understand if you’re able to handle that new obligation.

After you’ve made on-time payments for a few months, the impact of that hard inquiry should go away or diminish, experts say.

What Is A Good Credit Score?

There’s no one definition of a good credit score. That’s because there are several different credit scores that depend on different scoring models with different score ranges, and different lenders have their own standards for rating credit scores.

That being said, scores starting in the high 600s and up to the mid-700s (on a scale of 300 to 850) are generally considered to be good.

How A Good Credit Score Can Help You

A credit score is a numeric representation, based on the information in your credit reports, of how “risky” you are as a borrower. In other words, it tells lenders how likely you are to pay back the amount you take on as debt.

Credit scores are one piece of the puzzle that lenders look at to determine whether or not to lend to you. A good credit score can help you get access to a greater variety of loan offers. And if a lender approves your application for credit, a good or excellent credit score can help you qualify for lower interest rates and better terms.

In general, the higher your scores, the better your chances of getting approved for loans with more-favorable terms, including lower interest rates and fees. And this can mean significant savings over the life of the loan.

Having a good score doesn’t necessarily mean you’ll be approved for credit or get the lowest interest rates though, as lenders consider other factors, too. But understanding your credit scores could help you decide which offers to apply for — or how to work on your credit before applying.

Credit Score Ranges

There are many different credit-scoring models, and each one uses a unique formula to calculate credit scores based on the information in your credit reports. Even the best-known credit-scoring companies, FICO and VantageScore, have multiple credit-scoring models that produce different scores. (Credit Karma offers free VantageScore 3.0 credit scores from Equifax and TransUnion.)

But while there are many different credit scores, the most common models all use a scale ranging from 300 to 850. Within this scale, there are some general credit score ranges that can help you interpret what your scores mean.

Here are the credit score ranges to be aware of and what they mean for you.

Poor credit scores: 300 to low-600s

Having poor credit scores can make it difficult to get approved for a loan or unsecured credit card. But a poor credit score isn’t a financial dead end. Certain financial products, like secured credit cards, can help people who are working on building their credit. These products can be a helpful stepping-stone to accessing credit with better terms — if you use them carefully.

Be aware of potential fees and higher interest rates with credit-building products. And make sure the issuer or lender reports to the three major consumer credit bureaus — Equifax, Experian and TransUnion — so that important actions, like when you make on-time payments, can contribute to your scores.

Fair To Good Credit Scores: Low 600s - mid 700s

While you’re comparing your options, know that applying for a new loan or credit card may result in a hard inquiry, which can have a negative impact on your scores. Loans with preapproval or prequalification options can give you an idea of the terms you might qualify for ahead of time.

Very Good And Excellent Credit Scores: Above Mid 700s

People with top credit scores are the most likely to be approved for loans and credit cards with low interest rates and good repayment terms. But having very good or excellent credit scores doesn’t mean you’re a shoo-in for every loan or credit card out there. A lender could deny an application for another reason, like a high debt-to-income ratio.

Regardless of your scores, it’s a good idea to keep an eye on your credit reports so that you’ll know what lenders will see once you apply for a loan.

What Is The Highest Credit Score You Can Get?

There are lots of different credit scores with different ranges out there. But for the major consumer credit scores, generally the highest credit score you can get is 850.

Keep in mind that perfect credit scores may not be necessary to qualify for great rates on loans and mortgages. Once you’re in the “very good to excellent” range, you likely won’t see much of a difference in terms of interest rate offers from, say, a 790 to an 840. Moving from a 650 to a 700 will likely have a more significant impact, which is why the general credit score ranges are important benchmarks to consider.

How Good Should My Credit Scores Be…

To Buy A House

With today’s market, you can purchase a home with a credit score as low as 620, which is the lower end of the “good” credit range. But credit requirements vary depending on your state.

To Rent An Apartment

Prospective landlords may run a credit check before you can sign a lease, but there’s no single credit score benchmark you need to hit to be able to rent an apartment. It can depend on the factors the landlord is looking for in a tenant, as well as where you’re looking to rent.

To Get Approved For A Credit Card

It’s possible to get approved for a credit card with poor credit — or even no credit at all. Once you know what range your credit scores fall into, you can research cards that suit you and your goals.

If you have no credit, look for secured cards or cards for beginners (like student cards). If you have limited or poor credit, secured cards or cards advertised for building or rebuilding credit could be a helpful leg up. Once you’ve improved your credit, you may be able to qualify for more-enticing offers, such as rewards cards or balance transfer cards.

To Get Approved For A Car Loan

You may be able to get approved for a car loan with a poor credit score, but it could be more difficult to find one to qualify for, and you could face high interest rates. If you’re still working on your credit and can’t wait to take out a car loan, consider asking a trusted family member or friend to act as a co-signer, or see if you can put down a larger down payment.

Good credit scores can mean better terms, but it’s still worth comparison shopping.

FAQs

How do I get a good credit score?
Building a good credit score can take time. Here are some general practices we recommend that can help you stay on the right track.

• Check your reports. Knowing your scores and being aware of what’s on your credit reports is the first step to working on your credit. You can check your credit reports from Equifax and TransUnion for free on Credit Karma. Credit Karma also offers free credit monitoring.

• Pay on time. Your payment history is a major factor in your credit scores.

• Pay in full. Keeping your credit card balances low can not only save you money on interest, but can also help keep your credit utilization rate down. Your credit utilization rate is how much of your available credit you’re using. A good rule of thumb is to keep it below 30% of your total credit limit.

• Don’t close old credit accounts. A longer credit history can help increase your credit scores by showing that you understand credit and have been using it for a long time. Keeping your oldest accounts open can ensure that your overall credit history continues to age.

• Consider your credit mix. Your credit mix reflects the different types of credit you have on your reports, from credit cards to student loans. We don’t recommend applying for a loan just to get another type of credit account on your reports, but it’s good to know that this can factor into your scores.

How long does it take to get a good credit score?

It depends on where you’re starting from and what challenges you’re facing. But building good credit probably won’t happen overnight.

If you’re brand new to credit, it could take months of using beginner products like secured cards to make significant progress in the types of financial products you qualify for. If you have dings on your credit reports, like late or missed payments or a bankruptcy, it could take years for those derogatory marks to fall off and stop affecting your scores.

But even if you have years left before those derogatory marks officially fall off, you can still see significant progress. The important thing is to work steadily toward getting your credit in good shape and understand that building credit is a journey.

How do I find out what my credit scores are?

You can get your scores from Equifax and TransUnion for free on Credit Karma. Checking your own scores won’t hurt your credit. And you’re entitled to free credit reports from Equifax and TransUnion each year with details about important credit factors so that it’s easy to track your progress.