“How to Optimize Your Credit Utilization Ratio”

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How Much Credit Should I Use?

Your credit utilization ratio, also known as a utilization rate, indicates the percentage of available credit you’re using on revolving credit accounts, such as credit cards. A lower credit utilization ratio is beneficial for your credit scores, but a small amount of utilization is better than none. Ideally, the best revolving credit utilization ratio is around 1%. However, you don’t need a 1% utilization ratio to achieve an exceptional credit score. Keeping your utilization in the low single digits can be sufficient.

Average Credit Card Utilization in the U.S.

According to Experian, the average credit card utilization rates in the U.S. have varied over the years:

• 2010: 27%
• 2021: 26%
• 2022: 28% (+2 percentage points from 2021)

How Much Credit Should I Use?

For excellent credit scores, aim for a credit utilization ratio in the single digits. For instance, if your total credit limit across all your credit cards is $10,000, keeping your total usage under $1,000 is ideal. If you need to use more credit occasionally for bills or emergencies, it’s not necessarily harmful to your credit in the long run, provided you pay down the balance quickly.

Credit utilization is a crucial factor in credit scoring models, but most scores only consider current balances and credit limits on your credit report. This means a high utilization ratio one month may hurt your score, but paying down your balance and having your card issuer report the updated balance can quickly improve your scores.

Credit card companies typically report your account balance at the end of your billing period. Therefore, you could have a high utilization ratio even if you pay your bill in full, as the bill isn’t due until 21 to 25 days after you receive it. To avoid this, consider paying down your balance during the billing period instead of waiting until just before the due date. This can lead to a lower utilization ratio and better scores.

How to Lower Your Credit Utilization Rate

Your credit utilization ratio is calculated using your credit limits and current balances. You can lower your utilization ratio by increasing your available credit or lowering your reported balance.

Pay Off Credit Card Balances

Make an extra effort to pay off your credit card debt. You may also want to stop using your credit cards to limit how much new debt you add to your balance.

Request a Credit Limit Increase

Ask your card issuer to increase your credit limit. While issuers don’t have to say yes, it’s worth asking, especially if you haven’t missed any payments and usually pay more than the minimum due. Update your income information whenever it rises, as issuers may proactively raise your credit limit as your income increases.

Open a New Credit Card

Opening a new credit card can increase your total available credit. However, opening a new card could impact your credit scores in several ways. If you decide to open a new card, do your research and choose one you’re likely to be approved for before applying. Applying for multiple credit cards at once can hurt your credit scores.

Keep Your Credit Cards Open

Even if you’ve stopped using a credit card, keeping it open increases your available credit, contributing to a lower utilization ratio. If the card has an annual fee, consider asking the issuer if you can switch to another card without a fee.

Use a Loan to Consolidate Credit Card Debt

Credit utilization ratios only consider balances and limits on revolving credit accounts. Using a personal loan to pay down credit card balances moves the debt from a revolving account to an installment account. This can lower your interest rate or monthly payment and help your credit scores.

Check and Monitor Your Credit and Utilization

Calculate your credit utilization by comparing current balances and credit limits for revolving accounts on your credit report. When you check your credit report with Experian, your credit utilization ratio will be automatically calculated and displayed. You can also see the individual utilization ratio for each account. Both overall utilization and individual account utilization are considered in your credit score calculation.

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