Your credit utilization is the percentage of your credit limit that you use every month. It’s one of the factors that your credit bureaus use to determine your credit score. That means the higher the credit utilization, the lower the credit score.

With that in mind, it should be in your best interest to keep it low at all times through various methods. But before we talk about those, let’s talk in depth about what credit utilization truly is.

What Is Credit Utilization?

person holding a smartphone & a credit card

Your credit utilization ratio is the total quantity of credit you spend on general credit. In simpler words, it’s how much money you owe across multiple accounts, from your line of credit to your credit cards.

For example, you have a combined $10,000 on two credit cards. If you have used $5,000 on one or both of those credit cards, your credit utilization will be 50%, or in other words, you are using half of your general credit limit.

So how will your credit score get affected? Your credit utilization makes up 30% of your credit score. That said, a low credit utilization rate signifies that you’re not using plenty of your general credit, which can be interpreted as you pay your monthly bills on time, at least, or you’re not overspending. With that in mind, how do you lower your credit utilization? Here are some ways how.

Pay Your Balances Early

Having a high credit utilization ratio is not bad per se; it’s how you manage your debt. In other words, it doesn’t matter how much credit you use if you pay them up on time. However, if you want to lower your credit utilization fast, paying your credit as early as possible can be very effective.

Typically, lenders report your balance at the end of every billing cycle. If you don’t pay up your debts fully, your credit utilization will remain high. But suppose you pay earlier than that and more than the minimum amount. Your credit utilization will be significantly lower when your lenders report your account to the credit bureaus.

Decrease Your Spending

payment method

One simple yet very effective way to lower credit utilization is to spend less. Remember, your credit utilization is the amount you borrow against your general credit limit. If you don’t use up plenty of your credit in the first place, you won’t have a problem with your credit utilization ratio.

Not to mention that even if you pay early and above the minimum bill, if you have a lot of spending against your credit limit, all your hard work will be useless. Or, instead of decreasing your spending, why not use your debit card or, better yet, cash to pay for things?

Pay Off Your Balance With A Loan

Your credit utilization usually includes your revolving credit, which means you can pay it off if you apply for loans as long as it’s not revolving credit. That said, if you have a high credit utilization due to the balances you can’t pay off, you can get rid of this debt with various loans, but most commonly, people use personal loans.

However, there are several not-so-serious drawbacks to this approach. Because you’re taking out a loan, you’re bound to pay more since you’re using debt to pay another debt. It means you’ll have to pay the origination fee, down payment, etc. Not only that, but you also have a lot of requirements that you have to meet for you to qualify for the loan.

Increase Your Credit Limit

person holding several credit cards

While this is obvious to some people, others don’t know that you can request a higher credit limit from your credit card issuer. You can negotiate it if both parties consent to a negotiation. However, most of the time, they will have requirements you must meet before they allow you to negotiate in the first place. Also, the credit card issuer will usually base its decision on your usage, payment, and standing with their institution.

Final Words

Credit utilization is one of the biggest factors when calculating your credit score. That said, it should be in your best interest to keep it low by spending less, paying your debts on time, etc. With low credit utilization, you’ll have a better credit score, and your financial life will be easier with a better credit score.

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