Overview
Your credit utilization ratio is the percentage of available credit that you’re using. A credit utilization ratio above 30% is considered high and may negatively impact your credit score. When you consistently use a high percentage of your available credit, you may have more difficulty paying down the credit card balance and therefore be financially overextended. This is why it is considered a negative factor when calculating your credit score.
In this article, we will review five smart ways to keep your credit utilization ratio as low as possible – ideally below 30%.
Method #1: Use Micro Credit Card Payments
Instead of paying down the entire credit card balance at the end of the month, you may want to consider making micro credit card payments throughout the billing cycle. This may allow you to lower your credit card balance, which may result in a lower credit utilization ratio. This, in turn, may positively impact your credit score. If you wait until the end of the month to pay off your entire credit card balance, it may present a much larger percentage of your spending room and thus result in a higher-than-desired credit utilization ratio.
Method #2: Increase Your Credit Limit, but Don’t Increase Your Spending
If you have the option to increase your credit limit, go ahead. Usually, it’s a straightforward procedure that may involve a call to the bank. Once you are approved for a higher credit limit, you will have much more potential spending room on your credit card. However, keep your spending at the same level and prioritize fixed expenditures. This way, your spending may be a lower percentage of your total available credit. This may benefit your credit score in the long run. Never refuse an opportunity to increase your credit limit – just make sure your spending remains the same.
Method #3: Keep Your Credit Card Balances Low
If you aim to reduce your spending, you may be able to lower your credit card balances throughout the month. This may allow you to use a smaller percentage of your available credit than you otherwise would, which may benefit your credit score. Review your budget and consider whether there is any spending you can cut. In combination with the other tips, this basic yet effective tip may help you accomplish wonders.
Method #4: Avoid Lifestyle Inflation
Lifestyle inflation is the tendency to increase your spending when your income rises. For example, if someone gets a raise at work, they may be tempted immediately to start spending the extra money on things they don’t need. This may prevent them from building savings or taking advantage of the higher income that they are now earning.
Avoid this at all costs. If you get a raise or a higher-paying job, use the extra income wisely e.g. put it into savings or cover necessary expenses. Keep your credit card balances as low as possible, which may help lower your credit utilization. This may benefit your credit score, which is the ultimate goal, as your credit score is an important metric that lenders and prospective landlords may look at to evaluate your suitability for loans, rentals, or mortgages.
Method #5: Prioritize Fixed Expenses
Focus on paying your fixed expenses and minimize frivolous spending. Your fixed expenses may include things like rent, car insurance, home insurance, your phone bill, Internet, etc. By prioritizing your unavoidable expenses, you can then engage in pleasure spending more selectively and judiciously. Consider brewing your own coffee and cooking at home. Indulge in free activities such as walks in the park or going to the beach. Cut down your variable expenses wherever and whenever you can. This is one of the best ways to lower your spending and jumpstart a more effective financial life.
Final Thoughts
The above five tips may help you lower your credit utilization ratio. However, these tips must be practiced with persistence and consistency over the long term to achieve the best results. There won’t be an overnight change to your finances and financial metrics – it will come gradually over the long run.
Life happens. We’ve all been caught off guard by unexpected expenses. Given today’s volatile economy, it’s more common than ever. If you need quick funds, simply apply for a personal loan online via Crediteck. The application process is quick and easy. We don’t check credit scores or credit reports during the online application process. Funds may be deposited into your bank account as soon as the next business day!
