Mastering Credit Utilization: Simple Steps to Improve Your Ratio

A credit score is a true financial business card, and a good score can open doors, including the purchase of your dream home.

Did you know that credit utilization ratio is one of the key pieces of this equation?

This factor carries significant weight in your score, and understanding how it works can be the key to transforming your financial profile.

What is a credit utilization ratio?

In simple terms, the credit utilization ratio is the amount of credit you’re using relative to your limit. Let’s say your card has a limit of $5,000, and you’re using $2,000—your utilization ratio will be 40%.

The closer you are to 0%, the better, but that’s difficult for people who actually use their credit cards. Experts recommend keeping the ratio under 30%.

When you use too much of your limit, it signals to creditors that you might be experiencing financial difficulties, which decreases your credit score.

If you want to improve your score, it’s possible to reduce this ratio simply and without major drama. Here’s how!

Tip 1: Pay More Than the Minimum

The first rule of the game: pay more than the minimum! It sounds basic, right? But many people still make this mistake.

When you only pay the minimum, part of the payment goes toward interest, and you end up prolonging the debt for a long time, directly impacting your credit utilization since the balance remains high.

Start paying more than the minimum—or even paying it off completely, if possible. Doing so reduces your card balance, and automatically, your credit utilization ratio goes down.

Tip 2: Increase Your Credit Limit (but with caution)

Requesting a credit limit increase can be the solution for a utilization ratio that’s stuck. When you have a higher limit and keep the same spending, your percentage of utilization decreases.

For example, if you have a $2,000 limit and you’re using $1,000, your utilization ratio is 50%. Now, if your limit increases to $4,000 and you keep the $1,000 spend, the ratio drops to 25%.

The key challenge here is not to increase spending with the credit limit, as that’s not the goal.

Tip 3: Use More Than One Card (Don’t Centralize Everything on One)

Another trick that might work is spreading your spending across multiple cards, if you have them. If you concentrate all your spending on one card, you’ll easily exceed the recommended limit.

But if you spread your spending among all your cards, you reduce the utilization on each, which helps keep the ratio low.

Tip 4: No New Cards Unless Necessary

Opening a credit card on impulse can be tempting, especially when you see offers for “extra credit” popping up.

If your goal is to improve your utilization, it’s best to hold off. Every time you apply for a new card, your credit report gets a hard inquiry.

This can temporarily reduce your score, which is not what you want. So, unless it’s really necessary, avoid opening new cards. Only do so if you really need more credit and know how to use it wisely.

Tip 5: Secured Credit Cards—A Great Option for Beginners

If your utilization ratio is high or if you’re starting from scratch, a secured credit card might be the solution.

The process is simple: you make a deposit (which will serve as your credit limit) and, over time, build a positive financial history.

This type of card is an excellent way to improve your credit, especially if you’re trying to rebuild or start from scratch.

Tip 6: Monitor Your Spending and Your Credit Utilization Ratio

Last but not least, it’s essential to track your spending and utilization ratio frequently. Many banks and finance apps offer free tools for you to see how your credit utilization is doing and even set alerts.

Staying on top of this is crucial to avoid surprises and ensure you’re always on the right track.

With these tips, you have the tools you need to start making changes today and, thus, build a stronger and more advantageous credit score for your financial future.

Written by

Gabriel Gonçalves