Why keeping your credit card utilization low is essential?
It’s no secret that credit utilization is one of the key factors in credit scoring. But what exactly is credit utilization, and how can you ensure yours is where it should be?
Credit utilization is simply the amount of credit you use compared to the available amount. Divide your total outstanding debt by your available credit to calculate your utilization rate.
Financial institutions use credit scores to determine an individual’s creditworthiness. A high credit score indicates that an individual is a low-risk borrower. In contrast, a low credit score suggests an individual is a high-risk borrower. The Credit Utilization Ratio (CUR) is crucial in determining an individual’s credit score. The CUR is the ratio of an individual’s outstanding debt to their available credit.
How to calculate your credit utilization
To figure out your CUR, divide your total outstanding balances across all your bank cards by your total credit limit. Then, multiply by 100 to get the percentage of APR.
For example, if you held the average balance of $6,194 on your card(s) and had the average credit card limit of $22,751, you would use the following equation to figure your annual percentage rate (CUR): Divide the first number by the second by 100.
Suppose your utilization rate is near the standard 27 or below 10. In that case, there are always minor changes you can implement to increase your score.
Keep your credit utilization down with these easy tips
I’ve put together three guidelines to help you lower your monthly antithesis since CUR Freshens. Request a higher credit line. Avoid closing cards.
Get ahead of your finances by paying off your balances more than once a month
Instead of waiting until the payoff date on your credit card balances, consider making periodic bill payments during your billing cycle.
Credit card issuers report your charge card’s equilibrium to Equifax, Experian, and TransUnion credit reporting agencies. The bureaus then figure out your CUR based on that balance.
It would be best if you waited to understand the specific times your card issuer(s) will report your balance, but counting your tithings and paying your cards down frequently will help you determine the ideal times to do so. If you pay off your card regularly, you may pay only a small bill every month or even twice.
You also may call your card issuer to ask them if they report to the credit bureaus if you are attempting to manage several credit cards. Not all card issuers adhere to the same reporting schedule.
Another option is to sign up to receive text and email notifications from your credit card company. Consider using credit cards that are highly mobile-friendly so that you can review billing statements from anywhere.
For example, cardholders of particular American Express Green Card or American Express Gold Card credit cards can use the Amex Mobile app Pay It, Plan It feature to pay down small bills as soon as they post to their account. By employing this technique, cardholders can keep their tabs low in the balance. Terms apply.
Reasons to Request a Higher Credit Limit
Having little funds and high credit card limits is a recipe for low utilization. Consider contacting your credit card issuer to ask for a credit limit increase if you believe you frequently exceed your limit of 30 or more of your credit line.
Making your credit available to measurably higher levels allows you to spend less as you exceed the 30 credit limit. However, don’t spend more than you’re comfortable with. Higher credit limits provide you with more breathing space in your financial plan.
Pay at least some of your outstanding credit card balances to show you are financially responsible. (It isn’t required, but it will improve the likelihood of approval.) While you have t requested credit approval, your chances of approval are high if the conditions mentioned above are met.
You definitely have a high credit score (661 to 780). Your income has grown since you applied for the credit card.
Checking off the items mentioned above is hardly guaranteed, but a high credit rating and income increase your chances.
Before you ask to raise your credit limit, be aware that doing so might result in a hard inquiry if your credit card issuer inquires into your credit. Hard inquiries temporarily ding your credit score.
Are you closing your credit cards? You might want to reconsider
Before closing any of your credit card accounts, particularly your oldest one, think it over.
When you cancel your credit card, you interrupt the limit for that particular credit card in your overall accessibility. This is known to raise your reach and affect your credit score.
Eventually, following closing a credit card, your credit score will decrease. Still, gradually your score will go up again if you make your payments on all your credit cards on time.
Only pay annual fees of credit cards that no longer make sense or have excessive interest.