How to Keep Your Credit Utilization Rate Low

The lower your credit utilization rate, the higher your credit score can get. But just how much does utilization affect credit?

Credit reporting agencies TransUnion, Equifax, and Experian generally consider credit utilization rate as 30% of your overall score. But before we get into the nitty gritty, let’s define credit utilization in the simplest terms.

Understand the basics of credit utilization

Credit simply means borrowing money, and credit utilization means how much money you’ve borrowed. If your overall credit limit is $100 and you’ve borrowed $20, then your credit utilization would be $20. Likewise, your credit utilization rate would be 20%. In short, credit utilization rate is the measure of how much you’re borrowing compared to your limit. The goal is to lower this rate or percentage as much as possible. In a nutshell, credit bureaus consider a lower utilization rate a good sign because it means that you have the ability to both borrow money and pay it back. So, always keep your balances low and your limits high, which brings us to our next point.

Have at least one credit card with an above average limit

The larger your overall credit limit, the lower your current credit utilization rate. With a limit of $100, that $20 you borrowed earlier brings your rate in at 20%. But if your limit is $110, you can borrow the same $20 at a significantly lower rate of 18.18%. Raising your limit even by a bit can go a long way in managing your credit utilization rate. This is why Petal Card advises having at least one credit account with an above average limit compared to the others in your wallet. With at least one above average-limit card, you can have a little more room for keeping your rate at a manageable level.

Ask for a higher credit limit or get it restored

Another straightforward tactic is to simply call your credit card issuer and request for a higher limit. Your request is more likely to be honored if you’ve either recently increased your income or if you already have a good credit score. Recently, credit issuers lowered the limit even for card holders with good credit scores in order to lower the overall economic risk brought about by the global health crisis. If this is the case with your account, Business Insider advises politely calling your issuer to get your limit restored. Consider asking what you need to do to make this happen. Even if you can raise or restore your limit by just a bit, it will contribute to lowering your overall credit utilization rate.

Don’t close old credit card accounts

There are several credit-related reasons why you shouldn’t close old credit card accounts, such as the more accounts you have, the higher your credit limit is in general. Also, closing an old account could lower your average credit card account age, which could have a negative impact on your overall credit score. While closing old accounts can allow you to avoid paying whatever fees you need to keep them open, that benefit should be outweighed by how cancellations can raise your utilization rate.

Pay your balance as much as you can

Apart from raising your overall limit however you can, you should also strive to keep all balances as low as possible. Try to pay off your balances more than once a month. Currently, COVID-19 has made this hard for most credit card holders. However, if you can afford to do so, paying off balances as much as you can greatly help manage your utilization rate.

Remember that the key is to keep your balances low and your limits high. Keeping this in mind will allow you to keep your credit utilization rate in the single digits, which is the ideal range for your credit score.