If you carry balances month to month on your credit cards, you could be unknowingly weakening your credit score. Credit utilization, or the measure of the amount of credit you owe compared to your overall credit limit, can signal one of two things — either that you are a responsible borrower likely to meet your payment obligations, or that you are dangerously overextended with an excessive credit card and loan balances. To calculate your credit utilization, divide your credit card balance by your credit limit and multiply by 100. Experts generally advise keeping your credit utilization at 30 percent or less. Credit scoring bureaus will calculate the credit utilization ratio for each card separately, as well as the ratio for all of your available credit as a whole. The good news: Once you slash your credit utilization, your credit score will recover rather quickly. These steps will help you kick your balance-lowering mission into high gear.
Monitor All of Your Accounts
Set a goal for yourself to keep all of your credit balances at or under the 30% credit utilization. The trick to achieving that goal is to check in with your accounts frequently. Many card issuers also allow you to sign up for balance alerts via text or email. The more reminders you can have that your balance is creeping past the 30 percent level, the better. That awareness will help you keep your spending in check. If you know that one card is over the 30 percent limit, make a note to use a different card for purchases until you have whittled down the original card’s balance. (This technique will only work if your other cards carry a lower balance.)
Time Your Payments Appropriately
You might not realize that the balance that gets reported to the credit bureaus is the one that appears on your monthly statement. Check a copy of your billing statements to find out the date your billing cycle ends (also known as your account statement closing date). You’ll want to make sure your balance is low just before that cycle ends. That may mean you have to tweak your payment schedule and make payments well before the due date — but it’s worth it for the changes to your credit utilization.
Make Smarter Payments
Paying down debt, as much as possible, is the most straightforward route to attacking a high credit utilization. It unfortunately won’t be the easiest option for everyone. If you can’t pay balances in full, try to at least pay more than the minimum, at least twice a month, to trim your balances. Allocate the highest payments to the card with the highest utilization ratio.
Keep Your Cards Open
When you close an account, you also effectively erase a source of available credit. That, in turn, spikes your credit utilization ratio, as it will appear that you have less credit to use. That’s why you should always keep credit cards open, even if — actually, especially if — they are paid off. An older, paid-off credit card that you don’t use can only enhance your credit score, since it lengthens your positive credit history.
Request a Higher Credit Limit
You may want to ask your credit card issuer to bump up your credit limit. The increase should be just enough to lower your credit utilization ratio. However, make sure that the higher credit limit won’t tempt you into increasing your spending as well — or taking this step could actually compound your high credit utilization woes.
Consider a Balance Transfer
If you have a high credit utilization spread across several cards, it might make sense to transfer all of those balances to a low-interest card. That way, you have freed up credit on several cards, which looks better for your credit overall. Because you will also be saving on interest fees, you can also attack that balance faster. As with the other steps, you need to exercise caution. When you make a balance transfer, remember you are committing to paying down that balance. It is not simply a temporary relief that allows you to continue spending elsewhere.
Having a healthy credit utilization goes hand in hand with building an excellent credit score, and it’s certainly not the only way you can improve your credit profile. Let our team at Ovation Credit help you on the path to improving your score. Contact us today for a free consultation.