How to Lower Your Credit Utilization Ratio and Improve Your Credit

The credit utilization ratio is one of the top three factors that affect your credit score in the United States. The term may be quite confusing, but in this article, we will explore what the credit utilization ratio is.

Additionally, you will understand why it’s important and, most importantly, how you can reduce it to improve your credit score.

What is the Credit Utilization Ratio?

The credit utilization ratio is calculated by dividing the outstanding balance on your credit card by the total available credit limit and multiplying the result by 100 to get a percentage value.

For example, if you have a credit limit of $5,000 and an outstanding balance of $1,500, your credit utilization ratio will be 30% (1,500 divided by 5,000, multiplied by 100). Most credit experts recommend keeping this ratio below 30%, but the lower the utilization, the better it is for your credit score.

Why is the Credit Utilization Ratio Important?

Keeping a low credit utilization ratio is crucial because it reflects your financial behavior.

A high utilization ratio may indicate that you are frequently approaching your credit limit, which raises concerns about your ability to repay debts.

Moreover, a high utilization ratio can increase your debt over time due to accumulated interest, making it even harder to pay off the full balance.

How to Reduce the Credit Utilization Ratio

Here are some practical tips to effectively reduce your credit utilization ratio:

Pay More Than the Minimum Due

When you only pay the minimum, the remaining balance continues to accumulate interest, which can increase your debt and make it harder to pay.

By paying more than the minimum, you can reduce your outstanding balance more efficiently, which in turn will lower your credit utilization ratio.

Request a Credit Limit Increase

If you have a good payment history and your financial situation allows, a credit limit increase can instantly reduce your credit utilization ratio, even without making additional payments.

For example, if your credit limit is $3,000 and you have a balance of $900, your credit utilization ratio will be 30%. If your limit increases to $5,000 and the balance remains the same, your ratio will drop to 18%.

Pay Your Balance Before the Due Date

Paying off your balance before the due date can be especially helpful if you are approaching your credit limit at some point during the month.

By paying before the due date, you reduce the outstanding balance, which in turn lowers your credit utilization ratio.

Transfer Balances from High-Interest Cards

If you have debt on multiple credit cards with high-interest rates, consider transferring the balance to a card with a lower interest rate.

. This can help you pay off the balance faster without accumulating interest, which will help reduce your credit utilization ratio over time.

Avoid Making Large Purchases on Credit Cards

This is an important strategy for reducing your credit utilization ratio. If you have a credit limit of $2,000 and you want to make a $1,500 purchase, this will increase your utilization ratio to 75%, which can negatively affect your credit score.

Whenever possible, try to plan your purchases so that you don’t use a large portion of your credit limit at once.

Keep Your Old Credit Accounts Open

The length of your credit history is also an important factor for your credit score, in addition to the credit utilization ratio.

Therefore, keeping old credit cards open, even if you don’t use them frequently, can help improve your score and reduce your credit utilization ratio.

Final Thoughts on Changing Your Ratio

Reducing your credit utilization ratio is one of the most effective ways to improve your credit score in the United States, safely.

By paying more than the minimum due, requesting limit increases, paying balances before the due date, and transferring balances to cards with lower interest rates, you can reduce your utilization ratio and improve your financial health at the same time.

With patience and discipline, you can achieve a higher credit score and obtain better financial conditions for loans, credit cards, and other financial products.

Written by

Gabriel Gonçalves