Mastering Low Credit Utilization: Tips and Tricks for Financial Wellness
Your credit utilization rate—often misunderstood but incredibly important—plays a major role in determining your credit score. In simple terms, it’s the percentage of your total credit limit that you’re currently using. For example, if you owe $500 on a credit card with a $1,000 limit, your utilization rate is 50%.
Most financial experts recommend keeping your utilization below 30%—and ideally under 10%—to maintain or build a healthy credit score. High utilization can quickly lower your score, especially if you’re applying for an apartment or loan.
Not sure where you stand? Use our free Credit Card Utilization Calculator to instantly see your current usage and how much you may need to pay down to improve your credit profile.
Here’s how to lower and maintain a healthy credit utilization rate:
1. Understand the Basics
Recognize that credit utilization is a major component, accounting for 30% of your FICO score. Staying informed about its importance is the first step.
2. Monitor Card Balances Regularly
Make it a habit to check your credit card balances frequently. This helps you be more conscious of your spending and can serve as a reminder to make payments.
3. Increase Credit Limits
Requesting a higher credit limit on your cards can reduce your utilization rate. However, only do this if you're confident it won’t tempt you into spending more.
4. Set Balance Alerts
Many credit card companies allow you to set up balance alerts. These can notify you when your balance is nearing a percentage of your limit that you determine.
5. Pay Balances More than Once a Month
Instead of waiting for your monthly bill, consider making bi-weekly or even weekly payments to keep your balances in check.
6. Distribute Spending Across Multiple Cards
Rather than maxing out a single card, distribute your spending across several cards. This can help keep individual card utilization low.
7. Consider a Personal Loan
If you have high card balances, a personal loan can be used to pay off that debt. This transfers your debt from revolving credit (credit cards) to installment credit (loans), which can favorably impact your utilization rate.
8. Avoid Closing Unused Credit Cards
Unless a card has an expensive annual fee, consider keeping it open. Closing a card reduces your available credit, which can increase your utilization rate.
9. Be Cautious with New Credit
While opening a new credit card can increase your overall credit limit, too many hard inquiries can temporarily lower your credit score. Be strategic about when and why you open new accounts.
10. Educate and Empower
Stay updated on financial literacy resources and tools. The more you know, the better equipped you’ll be to maintain a low utilization rate.
Maintaining a low credit utilization rate is an ongoing journey, but with these tips and tricks, you're well-equipped to navigate the path. Prioritizing this aspect of your financial health can yield long-term benefits, from better loan rates to easier rental approvals.