What is credit utilization?
When trying to build your credit score, it is important to understand the concept of credit utilization, also referred to as the debt-to-limit ratio. Credit utilization is the total of all balances on your credit cards divided by the total of all your credit limits. So basically, it calculates how much of your available credit you are currently using. The less available credit you use, the better it is for your credit score.
Credit utilization can be calculated on a per-card basis, but it’s more common to assess your overall credit utilization by looking at all of your credit cards. Credit utilization accounts for about 30% of your overall credit score, so it is important not only to understand it, but also to learn how to properly manage it.
1. Keep track of how much you are charging on each card
To avoid a drop in your credit score for using too much of your limit, keep track of how much you are spending against each of your credit cards or accounts. Make it a habit to patrol your online accounts and keep tabs on your spending. If you are getting close to using 30% of your total credit limit on one card, try to make a payment or switch to using another card if the charge is essential.
2. Ask for higher credit limits
In some instances it’s tough to avoid utilizing more than 30% of your available credit. If that is the case for you, one solution might be to request a credit line increase on one or more of your cards. If you have a good record as a customer, you may be able to get a higher credit limit temporarily.
Another option to get a higher overall credit limit is to ask a friend or relative to add you as an authorized user on one of their established accounts. Keep in mind that attaching your name to the account of someone who is having problems with credit could affect your score as well. You want to be an authorized user on an account showing good payment history, preferably with a high credit limit and consistently low credit utilization.
A higher overall credit limit could help you keep your credit utilization lower than it would be otherwise, which could ultimately make a big difference in your credit score.
3. Set up balance notifications
Sign up to receive alerts via text message or email with your credit card issuer. With most major cards, you can choose to be alerted when the balance reaches a certain amount or percentage of your credit limit. Set a goal to keep the balance below 30%.
4. Find out when your card issuer reports to credit bureaus
Most credit card issuers report your balance and payment activity to credit bureaus once every 30 days. However, this may not always coincide with when your bill is due. If your issuer reports a few days before the end of your billing cycle, you’ll consistently look like you’re carrying a high balance even if you make a payment or pay it in full just a few days later.
This can be solved by placing a call to your card issuer’s customer service line and asking when they report to credit bureaus. Simply pay off as much of your balance as you can in advance of that date every month, and you could see a jump in your credit score.
5. Get into the habit of paying mid-cycle
By getting into the habit of paying twice per month instead of only once, it could help you keep your balance lower. If you carry a balance on any card(s), keeping it low will save you from racking up interest and is good for your credit score.