Credit card debt can be To carry a costly burden. Consider this Average annual percentage rate – Interest rate, plus no fees – of credit cards in the US News database, ranging from about 15% to 23%.
But credit card debt can cause serious problems beyond the money wasted on interest charges. If your card has high credit usage rates, it can hurt your credit score – even if you make all your payments on time.
What is Credit Utilization and Why Does Matter?
Your Credit utilization rate It takes two figures, your credit limit and your current balance, to calculate the percentage of your credit limit that you are using.
For example, if you have a credit card account with a $ 10,000 limit and a $ 5,000 balance on the card, your credit usage rate is 50%.
The lower your loan usage, the more attractive you are to lenders. “A low credit usage shows the lender that you are responsible with your credit,” says Leslie Tayne, debt resolution attorney and founder and managing director of the Tyne Law Group. “A high credit usage can harm your credit score.”
Credit scoring models such as FICO and VantageScore analyze your debt-to-limit ratio when calculating your credit score. With the FICO scoring model, credit utilization is 30% of your credit score. Therefore, when you reduce your credit card usage, your credit score may increase.
What is a good credit card utility rate?
If you want to earn and maintain a good credit score, it helps to know what the scoring model considers a good credit card usage rate. However, the answer to the question depends on the credit scoring model being used and your goals.
VantageScore experts often recommend maintaining a credit utilization rate of 30% or less. Nevertheless, a debt-to-limit ratio that is close to 0% is best.
Fair Isaac Corp., the creator of the FICO score, also recommends maintaining a low credit card usage rate – the lower, the better. Are you aiming for an excellent FICO score? According to the company, consumers with scores between 800 and 850 have an average revolving usage rate of 4% to 5%.
Chad Kushner, president of credit repair resources company Credit Repair Resources, provides a good rule of thumb. You want to show that you are using your credit card, “but at the same time keeping the lowest possible balance,” he says.
How can I reduce my credit card usage?
There are several ways by which you can reduce your credit card usage rate.
1. Pay your credit card balance. The simplest way to reduce your usage rate is to pay your balance. that’s easier said than done.
The good news about paying your credit card is that you do not have to reach 0% usage before you have a chance to improve your credit score. As you pay off your debt and reduce your credit card usage in increments, your score may start to increase slightly.
2. Know your statement closing date. Another tip to reduce your credit card usage is to know the statement closing date of your account and then pay your balance. “We owe the statement date,” says Kushner.
You can charge up to $ 5,000 on your credit card account throughout the month. But if you pay that balance first Statement closing date, Your credit report will show a zero balance. This is a 0% credit utilization rate.
3. Do not add to credit card balance. If you are trying to reduce your credit card usage, “avoid spending more than you can pay at the end of the month.”
Worried about fascination? Consider closing your credit card in a safe place rather than carrying it in your wallet. You can also apply a 24-hour rule to think about unplanned purchases.
Just don’t close credit card accounts in an attempt to curb your spending habits. Closing a credit card will increase your overall credit usage rate and may damage your credit score.
4. Ask to increase the credit limit. Increasing the difference between your credit card balance and your limit reduces your usage rate. Apart from paying your balance, a credit limit increase is another way to gain distance between these two figures.
Suppose you have a credit card with a $ 10,000 limit and a $ 5,000 balance. Your credit utilization rate is 50%. If you increase your limit to $ 15,000, your usage rate will drop to 33%, even if the balance is the same.
Asking your credit card company for a limit increase can help you maintain your usage rate within reason. If you need to make a big purchase then a higher limit can stop your hit score which you cannot pay immediately. But Tayen warned consumers not to go overboard with their spending, even if the request for a higher credit limit was approved.
5. Become an Authorized User. An out-of-the-box way to reduce your overall credit card usage requires a favor. If a friend or family member adds you as one in the correct credit card Authorized User, Your credit score may benefit.
“You can add someone to you as an authorized user in a credit card account that has a lower balance and a higher limit and a great salary history,” Kushner says. “Now your total or overall usage will be less.”
Of course, Kushner states that paying your credit card on time is an essential element to earning a good credit score. He encourages consumers to use credit cards responsibly and cannot charge more than this.
How much will my score be affected by reducing credit utilization?
In credit scoring, specific actions do not have exact point values. Reducing your credit usage rate to 10% will not increase your credit score by 10 points (or any other guaranteed number for that matter). This is not how credit scoring works.
The credit for all, Kushner says, is a unique DNA. The same action like paying with a credit card can affect different credit scores differently. It depends on your profile how low your credit card usage rate is on your credit score.
If your usage rate is already less than 30%, you may not see much improvement from paying with a credit card. But if you are hovering at or around your credit limit, you should see a big positive change by improving your credit usage.
You should expect at least some benefit to reduce your credit usage, although there is no guarantee as to how much you can improve your credit score. Remember, this factor ranks second in the history of payments when it comes to calculating scores, so improving your credit utilization rate can bring a big change.