Credit · September 14, 2020

Improve Your Credit Utilization Ratio With These Tips

Credit cards sometimes get a bad rap. Some people find that cards can make it easy to rack up debt with high interest rates. But when used responsibly, credit cards—and credit in general—can be a tool for building financial security.

The trick is to keep an eye on your credit utilization ratio, a measure of the portion of revolving credit available to you that you use at a given time. For example, if you have a $10,000 limit on your credit cards and you have a $2,000 balance, your credit utilization ratio would be 20%, assuming you don't have any other debts.

The ratio can have a big impact on your credit score. This number can affect your ability to get a good rate—or even get approved at all—on a car or home loan. It can even impact whether you get hired for certain jobs.

Many experts recommend keeping your credit utilization ratio below 30%, but generally the lower you keep it the better, and the higher your credit score will be. Follow these three tips to keep your credit utilization ratio low.


1 Pay off your credit card balance every month

The easiest way to reduce your credit utilization ratio is to use less credit. Focus on paying down any existing credit card balance, and don't charge items that you can't afford to pay off at the end of the month. That may mean putting off bigger purchases like a vacation until you've got the cash to fully pay for it. While delaying gratification can be tough in the short term, building the habit will pay off in the long run.

2 Ask for a higher credit limit

Consider calling your card issuer to ask whether they'll raise your credit limit. Most people who ask for a limit increase get one, but you'll have better luck if you have a history of on-time payments.

Keep in mind that doesn't mean that you have to use the higher limit. In fact, having access to the higher limit and not actually using it will have a positive impact on your credit score. In the example above, it you got the $10,000 credit limit raised to $15,000 and maintained the $2,000 balance, your credit utilization ratio would fall from 20% to 13%.

3 Don't close old credit cards

While it may seem like closing unused credit cards is good for your credit score, the opposite is actually true. You credit utilization ratio is cumulative across all existing lines of revolving credit, so closing an account can actually reduce your credit limit and hurt your credit score. One exception is if you have an unused credit card that carries a high annual fee. It may still make sense to cancel the card.

Enjoy the benefits of a higher credit score

Maintaining a low credit utilization ratio takes some work, but the payoff is a higher credit score, which can make the rest of your financial life easier. With a higher credit score, you may get a lower interest rate on loans, pay less for insurance and even qualify for credit cards with more valuable rewards programs. Take advantage of the offers—just make sure you're still paying off that balance.

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.