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Tips to Keep Your Credit Utilization Low
Lowering your credit utilization ratio may improve your credit score.
Your credit utilization ratio represents how much of your available credit you’re using and demonstrates to lenders how responsible you may be when repaying a new loan or line of credit.
High ratios show that you’re using a lot of your credit each month and may have trouble making your minimum payments on time. Lower ratios indicate that you’re managing your debt to lower levels… a potential signal that you could have your finances under control.
The lower your ratio is, the more lenders may be willing to work with you. So, how could you lower your credit utilization ratio?
Key Takeaways
Most experts recommend having a credit utilization ratio of 30% or less.
Your credit utilization ratio varies depending on your spending habits and how much of your credit you’re using.
Paying off balances, requesting credit limit increases, and keeping your accounts open even if you’re not actively using them could help boost your available credit and lower your credit utilization ratio.
What is a Credit Utilization Ratio?
Your credit utilization ratio, aka credit utilization rate, is a simple way to see how much of your total available credit you’re using. It typically only factors in revolving credit, like credit cards—debt that you use and repay regularly. The more of your credit limit you’re using, the higher your ratio is.
Your credit utilization ratio is an important factor in calculating your credit score, with lower utilization rates often translating to higher credit scores .
The ratio is expressed as a percentage and is easy to calculate. Simply add up the balances of each credit card and divide by the total credit limit of those accounts.1 You could also calculate your ratio on a per card basis, where you divide the balance of that account by the limit.
Here’s a quick example. Say you have the following:
Credit card A with a limit of $3,000 and a balance of $800
Credit card B with a limit of $11,000 and a balance of $2,000
Credit card C with a limit of $15,000 and a balance of $4,000
The formula for this example is as follows:
Total balance across all lines of credit / Total credit limit for all lines of credit X 100
($6,800 / $29,000) X 100 = 23.4%
In this example, your credit utilization ratio is 23.4%, below the 30% recommended by experts, which means lenders may be more likely to approve your application.
Tips for Improving Your Credit Utilization Ratio
Improving your credit utilization ratio may help you improve your credit score over time. Here are a few tips you that may help get your utilization ratio down and credit score up.2
Pay Balances off Each Month
Paying off your credit card balances in full each month keeps your utilization ratio lower by decreasing the amount of available credit you’re using. By not carrying a balance month over month, you may see an increase in your credit score.
Pro tip: making multiple payments each month may keep the balance (and thus your credit utilization ratio) lower, which could improve your credit score.3
Keep Accounts Open
Your total utilization ratio is based on the combined credit limits for all your cards. The higher your total limit is, the easier it may be to keep your total credit utilization ratio lower.
A great way to maintain a high total credit limit is to keep credit accounts open even if you’re not using them. Even better, keeping those accounts open could make your average account age older, which may further boost your credit score.4
Use Multiple Cards
As we mentioned, your credit score is most impacted by the overall utilization ratio between all of your credit accounts. However, the balances on individual cards may also play a factor. This means if you have one card that is near its limit, even if your others aren’t, your score may dip.5
To help keep your per card ratio low, consider spreading purchases across multiple cards. This way you’re accessing smaller amount of each card’s limit rather than a significant amount of one card’s limit.6
Request a Credit Limit Increase
If you’re in good standing with your credit card issuer, you may be able to ask for a higher credit limit, which would increase your total available credit if approved.
Keep in mind that requesting an increase may also trigger a hard inquiry, which could cause a minor score drop.7
Consolidate to Lower Balances
If you’re carrying high balances on one or more of your cards, you may want to use a debt consolidation loan. Some people turn to home equity lines of credit for debt consolidation, while others use personal loans. Shop around to see what works best for your situation.
Though you still need to repay what you’ve borrowed, a loan diversifies your credit mix, which may help improve your score.8 (Plus if you find a low-rate loan, you may save on interest over time!)
Open New Lines of Credit
If you only have one or two credit cards, opening another credit card increases your total credit limit and reduces your credit utilization ratio, as long as you don’t carry a balance on that third card.
Remember that applying for a new card causes a hard inquiry on your credit report and could cause a minor drop in your credit score as well. But if you make your payments on time and are mindful of your card balances, your score should rebound.9
Final Thoughts
Having a high credit utilization ratio may make it harder for you to qualify for loans and new credit cards. But if you use these tips and work at keeping your credit utilization ratio low, your credit score may improve over time.
If your credit cards are putting a strain on your monthly budget, consolidating that debt may be a way to lighten the loan.