Your credit is a useful tool, so it is necessary to manage it responsibly. Maintaining and cultivating a higher score will help you get in on the best credit card bonus offers, and it improves your chances of getting a better rate on a mortgage or other loan. One of the most essential factors in your credit score is the credit utilization ratio (frequently referred to as the debt-to-credit ratio).
Credit card use or credit use, for short, refers to how much of your available credit you use at any given time. You can determine your credit utilization rate by dividing your total credit card balances by your total credit card limits. The resulting percentage is a component used by most of the credit-scoring models because it is frequently correlated with lending risk. Most experts suggest keeping your overall credit card utilization below 30 percent.
Low credit utilization rates recommend to creditors that you can utilize credit responsibly without depending too heavily on it, so a low credit utilization rate can be correlated with high credit scores. Credit card utilization measures the existing balance on your cards relative to your total spending limit, and reporting agencies utilize it to assess how great you handle credit. A low ratio is good because it indicates that you are more capable of repaying the debt; however, a ratio of zero may hurt your score, since it does not show that you can utilize your credit responsibly.
Your credit use ratio is calculated across all your cards both cumulatively and individually. While the high ratio on a single card can get a red flag, the cumulative use has more weight.
That is great news for anybody in this condition because it means keeping a zero balance on some of your cards is less of a problem so long as you use them regularly. That said, there’s one way that maintaining a zero balance can hurt your score. Card issuers are known to cancel cards after sustained inactivity, and if your account is locked, then you lose that portion of your total spending limit. That means your utilization ratio will go up, which is not ideal, and you can lose any rewards you have received that have not been redeemed still.
How the credit card utilization affects credit scores?
There are several different credit-scoring models, so it is hard to calculate precisely how credit use will affect your credit scores. With that said, there is a strong correlation between a customer’s credit card utilization rate and their credit scores. Although individual cases can change, those who keep their use percentage low have high scores than those who habitually max out their credit cards.
If you do not want your credit utilization to negatively affect your credit scores, consider your spending habits. Factors like your credit history and many cards in your wallet matter, too. High utilization on a single credit card can particularly hurt your credit scores if you have a short credit history and one card. On the other hand, you may feel the impacts less if you have a long and best credit history and spread your utilization across multiple cards.
How to lower credit card utilization?
Here are tips that will help you lower credit utilization.
Make payments from your credit card more than one time a month. In this way, your balance will not get too high. The credit card issuer will report the credit activity to the credit bureaus once a month. So, if you pay off a portion or all of your credit card bill before that date, you can low your credit use.
Spread your charges across multiple cards every month
Utilizing multiple cards will result in multiple accounts of lower credit use instead of 1 account with high utilization. But keep in mind that specific credit-scoring models will look at your overall credit utilization and the utilization on individual credit cards, so this technique cannot work.
Increase your available credit
If your income has increased, you have continued a good credit history or you have less debt, it does not hurt to ask for a credit limit increase. Remember, this can sometimes result in a hard inquiry on your credit. If you do not have the best credit, you can want to think about opening a secured credit card and adding to its security deposit over time.