The credit utilization ratio is used by credit reporting organizations for calculating a borrower’s credit score. It is the percentage of your total available credit you can use at a given point in time. In other words, credit utilization evaluates the balance you owe on your credit card relative to your credit card limit. The credit utilization ratio is just a component that goes with your credit score.
The golden rule with credit utilization is to keep it under 30%. Having a credit utilization score above 30% may land you in trouble while paying bills, or applying for loans or mortgages as it indicates high expenditure which is not at all good. Whereas a low credit utilization score shows you are using less of it. It also suggests that you are efficient in managing your finances and less dependent on credit.
For a low credit utilization value, one needs to make an effective equilibrium between credits limit and financial balance. Here is how you can do so:
- Reduce Your Expenses
Reducing your expenses will directly affect your tendency of opting for a credit card. Try to use cash or any other medium of payment for any of your expenses. When you track your spending and control or suppress it, you will automatically not use a credit card. This will help you to pay your previous debts even more quickly and timely. It will also avoid adding further debt or financial burden.
- Try To Pay Your Debts As Soon As Possible
For a better credit utilization score, paying off your previous debt is very important. Make sure while settling down the previous debts, you are not adding any new debts to your card. Paying a small extra amount every time while paying for previous debts can cover a big amount in the long run. This will also speed up the process of settling debts. Also, you may be debt-free before time.
- Have More Than One Credit Card
Applying for a new credit card is another way to increase your available credit. No doubt having more credit cards will tempt you to increase your expenses. But applying for an additional credit card is one of the best ways to reduce your credit utilization score. Having an alternate or additional card is all about your determination to manage your credits vs. your expenses while keeping your payback capacity in mind.
- Request For Higher Credit Limit
If you find it difficult to control your expenses, and at the same time you need more credit but want to decrease your credit utilization score ratio, you can simply request a higher credit card limit. Using higher credit limits automatically decreases your credit utilization ratio. You can request a higher limit if you have a good-standing credit card. A higher credit limit can be helpful in the short run. But make sure you are paying debts back quickly to avoid the overburden of credits.
- Put Your Unused Cards on Hold
To reduce your credit burden, settling down all your dues is very important. After paying all the previous debts, you may leave your credit card unclosed. These unclosed cards may help lower your credit utilization score. This is because you settle all debts. In turn, it shows that you do not heavily depend on credit. By keeping your unused card or cards whose debts have been paid off, you can effortlessly maintain a low credit utilization score.
- Repay Your Credit Card Bill by Taking Personal Loan
One more way to lower your credit utilization ratio is to repay your credit card bill through a personal loan. You may pay all the debt at once or in instalments. The first thing you need to do is calculate all your debts and then opt for a loan that offers the minimum interest rate. This option comes with caution as it is not very easy to get a personal loan and collateral may be required for a high amount loan.
If you are successfully granted funds, it may be beneficial as the credit utilization rate directly reflects how good you are at revolving credit and paying off all your dues. As soon as you pay all your debts through the loan, your credit utilization score will improve.
Low credit utilization on available credit limits gives a good impression to lenders about your creditworthiness. The more you prove yourself as less dependent on credit, with timely repayment of dues, the greater trust banks/NBFCs will have in you.