Our credit scores affect many different factors of our lives, from getting approved for new credit cards to mortgages to job applications. And one major component of our credit scores is our credit utilization rate. The more of our overall credit we use, the less financially responsible we appear to potential lenders.
If you are worried about your credit utilization, you may want to find quick and easy ways to reduce your utilization ratio or even hide it from your credit reports. We will give a brief overview of what credit utilization is and five simple hacks to improve it.
- Your credit utilization rate makes up a significant portion of your credit scores, which is why it is crucial to keep your utilization ratio low.
- There are several hacks you can leverage to quickly improve your credit utilization, including paying your cards down more frequently, decreasing spending, requesting a credit limit increase, etc.
Before we go into the details, we should preface that there is no way to “hide” your credit card utilization in your credit reports. However, there are ways to reduce your utilization ratio, which will help boost your credit scores.
Understanding Credit Utilization
Your credit card utilization rate is the ratio between your debt and your total credit limit across all your credit cards. In other words, it is the percentage of your credit limit that you are currently using. The rule of thumb is to use 30% or less of your credit limit at any given time, though I generally aim to use 10-15% at most.
From a lender’s perspective, a high utilization ratio is a red flag because it indicates that you may have trouble paying your bills on time, hence why you are using more credit. On the other hand, a low utilization rate shows that you are a responsible borrower and is better for your credit scores.
To calculate your credit utilization ratio, combine your balances from all your credit cards and divide that amount by your combined credit limits. For example, let’s say you have two credit cards – one with a $2,000 credit limit and one with a $3,000 credit limit. You have a $500 balance on the first card and a $1,000 balance on the second card, making your total balance $1,500.
Credit card 1 = 25% utilization ($500/$2,000)
Credit card 2 = 33% utilization ($1,000/$3,000)
Overall = 30% utilization ($1,500/$5,000)
5 Hacks to Decrease Your Credit Card Utilization Rate
Good credit utilization is a powerful tool to build up your credit in a short period. It may take months or years for you to recover from bankruptcy or late payments, but your credit could improve a lot if you’re able to pay down all your debt quickly. While you cannot hide your credit utilization, here are five ways you can improve your overall credit utilization rate and thus your credit.
1. Pay Down Your Credit Card Balances Frequently
You should never use your credit cards as long-term loans. That’s a surefire way to rack up a mountain of debt and drag your credit scores down in a short timeframe. The only exception is if you use a 0% APR credit card for a big-ticket expense or to clear any existing debt over the 24-36 months promotional period.
Aside from this exception, you should always make on-time payments in full at the end of each billing cycle. One tricky nuance to note is that the balance your credit card issuers report to the three major credit bureaus – Equifax, Experian, and TransUnion – may differ from how much you spend each month.
Usually, your credit card providers will report the balances at the end of your billing cycles, or your statement balances. But, that is not always the case. Sometimes, issuers may send the information to the credit bureaus simultaneously for all their cardholders regardless of when their billing cycles end. That means your issuers may report your balances before you’ve paid them off, which will be the amounts that your credit report uses to calculate your utilization rate.
If you are not sure when your credit card issuers report your balances, your best bet is to contact customer support. Knowing when your data gets reported can help you tremendously in keeping your utilization down and potentially gaming the system.
For example, if you know that your credit issuers report your data on the day your billing cycle ends, you can try to pay off your balance before the payment and statement closing date. You can make smaller and more frequent payments to reduce your utilization on paper. But, how often you pay off your debt will depend on your balances and cash available.
Alternatively, you can set a limit for yourself and pay off your balance every time that limit gets reached. While I was studying abroad in college, I only had one credit card that I could use that did not have international fees. Because it had a $2,000 credit limit, I had to pay off my debt every time I spent a few hundred dollars on the card to ensure that my credit utilization rate remained low. So I would make multiple payments in a month to keep my credit card balance below 30% on months where I was traveling.
2. Raise Your Credit Limit
If you increase your credit limit, you can significantly improve your credit card utilization ratio. A higher overall credit limit means that you have more credit available. So, your spending as a percentage of your total credit will be lower.
However, this is not an invitation to change your spending habits since that will effectively cancel out the benefits of increasing your total available credit. Additionally, if you have poor credit management or tend to overspend, raising your credit limit may not be the best idea.
There are two ways you can do this:
Apply for a New Credit Card
When you open a new credit card account, your total available credit increases, which raises your credit limit. But, there are a few caveats to keep in mind. When you apply for a new card, the lenders will pull a hard inquiry on your credit, which usually causes your score to dip slightly. Additionally, it may reduce the average age of your credit card accounts, which is another factor in your credit scores (though credit utilization carries more weight).
Most of the time, you will not know your credit limit for the card until you get approved for it. Some factors that can affect how high your credit line includes your income and credit history.
Ask Your Credit Card Company to Raise Your Credit Line
Your other option is to go to a credit card issuer you have an existing account with and ask them to raise your credit line through a soft inquiry. If you have consistently paid off your bills on time or have increased your income since you got the card, your card issuer may be willing to raise your credit limit. You can make this request online or call their customer support. To get approved for the increase, you may need to meet certain criteria, such as having an account open for 6+ months.
3. Decrease Your Spending
If you have been working hard to pay down your credit card bills but struggle with maintaining low credit balances, it may be time to lower your spending or stop using your cards completely. Otherwise, your new purchases will just offset your payments.
There are several ways you can attempt to do this:
- You can create a budget and identify your needs and wants. I currently use a variation of zero-based and value proposition budgeting to spend intentionally and only buy what I need.
- You can switch to a debit card or cash for your everyday purchases. That way, you can only spend the amount you have in your accounts or on hand, and that’s it.
- You can automate your savings and investments. For example, at my previous company, I automatically invested 10% of my paychecks toward my 401(k) and deposited money into my savings and investments right after I get paid. Doing this ensured that I paid myself first and prevented myself from overspending.
Your credit utilization should eventually improve when you lower your spending since you are spending less of your available credit.
4. Keep Your Accounts Open
As you start getting your finances in order, you may get tempted to close credit cards that you do not use anymore. While this step can help you manage your credit cards better, this will also lower your available credit and the average age of your accounts, which then hurts your credit scores.
When I was researching new credit cards to apply for, I wanted to close some of my existing cards because I felt that the benefits were not that great. However, I decided against that option because it would negatively affect my credit. Instead, I use them just enough to keep the accounts active.
Depending on the credit scoring models used, closing an account can have a huge impact on your credit, especially if that is one of your oldest accounts. If you struggle with balancing multiple credit cards, try using some of your less active cards for smaller purchases every once in a while. For one of the cards that I use less frequently, I charge my Spotify subscription to that account and use it for miscellaneous smaller purchases throughout the month.
5. Clear Your Debts Strategically
If paying off your credit card balances is difficult for you, make your payments more strategically. You should be keeping your utilization low for individual cards and your overall credit limit. If you have specific cards with much higher utilization rates than others, pay off those cards first.
The key is to chip away at balances of the cards with the highest usage first before your data gets reported to the bureaus. For example, if you have a card with a 25% utilization rate and one with a 50% rate, focus on the latter. You can improve your utilization to the desired 30% or less by reducing the second balance.
The Bottom Line
Focusing on your credit utilization is the easiest and fastest way to improve your score. Although you cannot hide your credit card utilization from your credit reports, you can certainly take steps to improve it.
Remember that while the tips and tricks we laid out can help you lower your utilization rates and boost your credit, you will need to eventually put together a plan to tackle your debt and better manage it in the future. Building excellent credit takes time and requires regular maintenance.