Are you determined to keep your credit scores up? Then you need to pay attention to your credit card utilization ratio. This article highlights the importance of a credit card utilization ratio and how it can affect your credit scores. Keep reading to find out more.
What Is Credit Card Utilization Ratio?
Your credit utilization ratio, also called credit utilization rate, is the amount of available credit you currently use divided by the total amount of revolving credit you have available. It measures how much of the available credit you use.
A credit card utilization ratio is usually expressed as a percentage. If the rate is 25 percent, it means you’re using 25% of the credit available to you.
For example, if you have a single credit card with a $10,000 credit limit, a credit card utilization ratio of 25% indicates you currently have a $2,500 balance.
On the other hand, if you have two credit cards with a total credit limit of $10,000 and a balance of $5,000 on one, your credit utilization rate is 50%. It means you’re using half of the total credit available to you.
What Is a Good Credit Utilization Ratio?
It is usually recommended that you keep your credit utilization rate below 30% of your available credit for both your FICO Score and VantageScore.
For example, if your total credit limit is $10,000, your total revolving balance shouldn’t exceed $3,000.
A low credit utilization ratio generally indicates that you are managing your credit responsibilities. On the other hand, a higher rate could indicate to potential lenders or creditors that you’re having trouble managing your finances which can negatively impact your credit score.
Steps to Reduce Your Credit Card Utilization Ratio
Pay-off Debts Early
Try to pay down the balance before the end of your billing period and, better still, pay more than the minimum each month. Making two or more monthly payments can help keep your utilization ratio low.
Apply for a Credit Limit Increase
You can ask your card issuer for a credit limit increase. By increasing your credit limit, you’ll have more available credit on your account, which will automatically lower your credit utilization ratio. But you need to take care not to turn your new credit into new debt.
But some card issuers may want to pull your credit with a hard inquiry (which can have an effect on your scores) to verify that you qualify for one.
Consolidate Credit Card Debt with a Personal Loan
Refinancing credit card debt with a personal loan can benefit you in more ways than one. You can try getting a personal loan with a lower interest rate than your credit card, which can save you money. Especially when you have more than one credit card, consolidating multiple credit card balances into one loan with a lower interest rate can reduce the amount of interest you’ll pay on that balance over time.
It is also easier for most people to keep track of a single monthly loan payment instead of multiple credit card payments. If you keep the credit cards open after transferring the balance to a personal loan, your credit utilization ratio will automatically decrease.
Your credit utilization ratio is one of the main factors that can help you increase your credit score. So try your best to keep your credit utilization as low as possible. If you have a lot of high balances and late payments on your record, don’t worry. Contact our qualified team at Briteside Solutions, and we will help you turn your credit score around. Visit our website to get the best financial advice.