Tips to Lower Your Credit Utilization

Reducing your credit utilization can improve your credit score in a matter of weeks. Credit utilization is the portion of your available credit (i.e., the limits on your credit cards) that you use, expressed as a percentage. To calculate your credit utilization, add up the total balances of all your credit cards and divide that sum by the number of credit cards. For example, if you have a credit card account with a $1,000 limit and a $500 balance on the card, your credit utilization rate is 50%. Ideally, you should keep your credit utilization below 30%.

One of the reasons reducing your credit utilization can have such a profound effect on your credit score is because it accounts for 30% of your FICO® Score and VantageScore, the two systems used by the three credit bureaus (Experian, TransUnion, Equifax) to calculate credit scores. This is the second largest factor to your credit score—right behind on-time payments.

The second reason is because credit card companies report balances every month, so changes in your spending habits are reported frequently, giving you more opportunities to improve your score.

Here are five ways to reduce your credit utilization and improve your credit score:

Monitor and reduce your expenses. Let’s start with the most obvious step—spend less. Or use your credit cards less to pay for things if you can pay cash. One way to monitor your credit utilization in real-time is to set alerts or thresholds with your credit card company. If you have a $1,000 credit limit, set your alert for $300 so you know when you hit your 30% threshold. Then you can stop using the card until you can pay it off in full. Creating a budget will also help you avoid overspending.

Pay your credit card bill more frequently. You can make smaller, more frequent payments instead of one large payment, a.k.a. your statement balance, on your statement closing date. Because most credit cards report credit card balances to the credit bureaus after your statement closing date, they are reporting your largest statement total and most credit utilization, even if you pay off that balance in full after receiving your monthly statement. If you continually pay off the balance throughout the month, the credit card company will report a low or no credit utilization!

Ask for a credit limit increase. Your card issuer(s) may be willing to increase your credit limit if you’ve had on-time payments for the last six months—sometimes before then. They may also automatically increase your limit if you update any income increases. It works something like this: If you have a credit card with a $10,000 limit and a $5,000 balance, your credit utilization rate is 50%. But if you increase your limit to $15,000, your utilization rate falls to 33%, even though the balance is the same.

Use a personal loan to pay off credit card debt. You can consolidate credit card debt spread over multiple cards with high interest rates by taking out a personal loan from your credit union to pay off those cards. Learn more about our APCI FCU Personal loans or transfer your balances to our Mastercard Plus credit card. This will give you one fixed payment on your debt per month at a lower interest rate, and it has the potential to raise your credit score. It will bring your utilization down to 0%. Remember, debt consolidation only works if you work hard to pay off that debt without accruing more debt in the meantime.

Don’t close credit lines. Even if you aren’t using a credit card, it’s unutilized credit limit is still used in your credit utilization calculation and only helps you. Closing a card lowers your credit utilization and can lower your credit age—two things that will lower your credit score. If using the card is a temptation, you can go ahead and lock it up or cut it up, but don’t call and close the account.

If you follow one or more of these tips, you should see some improvement to your credit score—assuming you are making on-time payments across all lines of credit! Visit our Financial Resource Center for more educational resources.