How to Improve Your Ratio with Credit Utilization Tips
Credit utilization ratio is a key factor in determining your credit score. Credit cards get a bad rep, and often with good reason. It is very easy to make many smaller purchases and end up racking unexpected debt. This doesn’t only put you in an unfavorable financial situation, but revolving credit (credit cards and credit lines) is an important factor in calculating your credit score – commonly more important than larger loans.
On the other hand, if you manage your credit cards responsibly and try to make fewer purchases, it can be very beneficial. Not only will you have more money on hand, but you will also have a better credit score, which will lead to lower interest rates. A lower interest rate directly translates to more money in your pocket when taking out a loan. In order to optimize your positive credit, you need to understand the credit utilization ratio and how to improve it.
What is Credit Utilization Ratio?
The credit utilization ratio is the ratio between your credit limit and your credit card balance, presented in percentages. It has a large impact on your credit score – for the two most common models, the FICO score and VantageScore, it makes up to 30% of your overall score. Your credit card issuer relates your payment history to the credit bureau and they use it to calculate your ratio. The lower the utilization ratio, the better.
Credit Limit and Card Balance
Your credit limit is the available credit you have – the maximum dollar amount you can spend when using a credit card, before having to pay it off. Your credit balance is the amount of money you are using, i.e. that you owe to your credit card company.
How Is the Credit Utilization Calculated?
Calculating your credit utilization ratio is rather straightforward – divide the credit balance on all of your cards with your card limit. Let’s say you have two cards with a credit limit of 3000 on one and 7000 on the other, while your card balance is 1500 on the first one and 500 on the second. You owe 2000 in total and your overall credit limit is 10000, so your ratio is going to be 2000/10000, or 20%.
You can calculate your per-card ratio, but that is not important for lenders. Your credit report will show your overall ratio. So, getting a new credit card just to get a low ratio on it, while your other cards have a high ratio will not improve your credit score.
Improve Your Score with These Credit Utilization Tips
There are multiple ways you can do it, but some are more effective than others. Of course, paying off your bills on time is the first step. If you are intending to take out a loan, first get your credit utilization ratio as low as you can. This is one of the most important credit utilization tips we can give you. It will impact your score and you will get better loan offers and lower interest rates.
Take note that if you pay a part of your credit card bill it may not show up on your credit report immediately. In general, this information is updated every 30 days during the billing cycle, so may need to wait a bit before it manifests in your credit report.
Don’t Go Over 100%
No matter what you do, try not to go over 100%. This will have a negative impact on your credit score. If at all possible, any non-essential purchases should be left for when you pay off some of your debts. We understand that this may not always be possible and you need the money. One trick that can get you below 100%, while still using the same amount of money, is to increase your credit limit.
If your limit is 1000 dollars, but your balance is 1100, your utilization ratio is 110%. However, if you manage to increase your limit to 2000 and still use the same amount of money, your ratio will be 55%. This will no longer have such a negative impact on your credit report. This is a risky tactic as you may end up just spending more money and going over the limit again. Your ratio will then still be bad and you will owe even more money.
Try To Stay Below 30%
Staying below 30 % credit utilization is a good rule you should follow. It is achievable and shows up as positive credit on your credit report, which will increase your score. As an example, if your limit is 1000 dollars, having a balance below 300 is good.
1-9% is Ideal
If you can somehow manage to keep your credit utilization between 1-9 %, you’re good to go. This will benefit your credit score the most. As was mentioned previously, this included the ratio of all of your cards, not just one.
What About 0 %?
A 0 % utilization won’t hurt your score, but it won’t improve it either. The goal of the ratio is for lenders to see if you manage your loans responsibly, and not taking out any loans means that they can’t get the information they require.
Talk To a Credit Analyst
You should always have a credit analyst go over your credit report, especially if you are intending to take out a large loan. An analyst can give you customized credit utilization tips and explain what you need to do to improve your credit score.