If you’ve researched how to improve your credit score, you might have already heard that lowering your credit utilization rate is one of the significant ways of improving it.
Your credit utilization rate is essential since it tells you how much credit you’re using in your overall credit limit. If it’s high, you’re using a lot of your credit, and vice versa.
Pay Off Your Balances at Least Twice a Month
Instead of waiting for your monthly bills, you can deliberately pay off your balances multiple times throughout your entire billing cycle. Why is that important? You see, credit card issuers often report your balances and payment records once a month. Usually, they report to credit bureaus like Equifax, TransUnion, and Experian. However, it’s hard to know when they report your account history.
That said, if you only pay once a month, there’s a big chance that they will report your account with a high balance. But if you pay your balances frequently, there’s a huge chance they will report your account with a low balance, resulting in a lower credit utilization rate. Some people pay off their balances as soon as they use them, but you could usually be reported with a low balance if you pay off bimonthly or weekly.
One thing you could also do is pay off your credit card balance with a loan. Of course, it’s not as efficient, but they have the same result. Not only that, there are a lot of loans you can use to do this. You can even get one online.
There are a lot of online lenders, such as CreditNinja, that can offer you loans no matter where you are. That said, whether you’re looking for Michigan online loans, New York personal loans, or online loans Illinois, you can get one anytime and anywhere.
Decrease Your Spending
Having a high balance on your credit cards always boils down to how much you spend on them. So, if you want to lower your credit usage, you might want to cut down your spending or at least limit the usage of your credit cards.
Otherwise, your purchases might offset your payments or even keep your balance high, resulting in a higher credit utilization rate. It’d be better to use your debit card instead of your credit card or, even better, use cash.
Increase Your Credit Limit
If you don’t know what your credit utilization rate is, then there’s a simple formula that you can use. First, look at your credit card’s credit limit. Then divide the balance on your monthly statement by your credit limit. Multiply it by 100, and that’s your credit limit.
For example, let’s say your credit limit is $5000, and you spent $1000 on your monthly billing. You divide 5000 by 1000 and multiply it by 100, then you get 20, and your credit utilization rate is 20%.
Now that you know what your credit utilization rate is, how do you go about reducing it?
One way to lower your credit utilization rate is to increase your credit limit. You can request your credit card issuer to increase your overall credit in an effort to lower your credit utilization rate. Usually, you have to meet the criteria before they can approve this request.
Most of the time, they consider your usage and payment history with your credit card. If you usually have late payments and a constant high balance on your credit card, they are more likely to reject this request.
You also have to note that requesting a higher credit limit creates a hard inquiry. If you don’t know what that is, hard inquiries are one of the factors that lenders use to check your credit reports. Having several of them isn’t a bad thing per se, but if you have too many hard inquiries in a short period, your credit score will dip. With that in mind, always be careful when requesting a higher credit limit.
Open a New Credit Card
If you think you won’t be approved for a higher credit limit, you can open another credit card instead. You won’t necessarily know how much credit limit you’ll have before you get approved, but it’s still good to have more since it will still lower your credit utilization no matter how much credit limit you’ll have.
However, you should also note that opening a new credit card also creates a hard inquiry. If you’ve had a lot of hard inquiries within a period, you might want to avoid opening a new credit card.
Don’t Close Unused Cards
Even though they are unused cards already, they still contribute to your credit limit. This means that if you close them, you’re also lowering your overall credit limit, which is counterproductive. With a lower credit limit, your credit utilization will increase. Not only that, but the calculation of your credit score also considers the average of your credit accounts.
Lowering your credit utilization rate is one of the most critical factors in calculating your credit score. By making improvements to your credit utilization rate, your credit score will experience a considerable increase immediately. And the best part about this whole thing is that lowering your credit utilization rate is relatively easy.