You have decided to take the bull by the horns and keep better track of your finances, and that includes tracking your credit score. You know you are good at paying on time at least the minimum amount due on your credit cards and other revolving debt, but your tracking indicates you have a high credit utilization ratio, also known as CUR.
But what does CUR mean and how important is it?
Your credit utilization ratio is how much you owe on each revolving credit account that you have compared with the total amount available. It also looks at what you owe on your revolving credit overall compared to the total amount available. According to Experian, this ratio can affect up to 30% of your credit score, making it one of the most influential factors.
Here’s a quick example of how it works. If you have a credit card with a $500 credit line and you have used $100, you would divide $100 by $500 to find that your credit card utilization ratio is 20%. Note that this ratio only looks at revolving credit, such as credit cards or lines of credit, which don’t have a predetermined start or end date but do have a limit on the amount you can borrow. They allow you to borrow against them, pay some or all of it back and then borrow again.
What should my credit utilization ratio be?
A good ratio is considered to be 30% or less, according to Experian. So if you have a credit line of $1,000, you would need to keep the balance at or below $300 to achieve that.
Should you look at your ratio for each revolving credit account or as a sum of its parts across all of your credit lines? Experian says you should manage both. It is best to keep each of your credit lines at or below the 30% utilization mark as well as the overall ratio. Doing so will ensure your credit score is positively affected by this factor.
If your ratio is higher than it needs to be, here are some strategies you can use to lower it.
Pay down your debt
The first option is to pay down some of your debt. You can calculate what your balance needs to be to reach at least the 30% ratio threshold and then focus on paying it down, so it stays at or below that amount. To calculate the maximum balance you should keep on each of your accounts, you will want to multiply 0.30 by your maximum credit limit. For example, a $1,000 credit limit multiplied by 0.30= $300 maximum balance.
Increase your credit limits
Another easier way to lower your ratio is to increase your credit limits. To go this route, you contact the lenders you have credit lines through and request a credit limit increase. Getting approval will depend on your history with the company, your credit score and the policies your lender has on credit limits. If you have made timely payments and have improved your credit score, the chances of approval will be better.
Use a personal loan to consolidate revolving debt
A personal loan can also help in lowering your credit utilization ratio because it is considered an installment type of debt rather than a revolving debt. You can take out a personal loan and use it pay down some or all of your revolving debt. As a result, you can lower the amount of revolving debt you have and can potentially improve your credit mix. Here’s an example.
Say you have two credit cards with $2,000 credit limits and you owe $1,000 on each of them. This puts your credit utilization ratio at 50%. If you take out a personal loan for $2,000, you could pay off the revolving debt balances and then make payments toward your new personal loan, which won’t count toward the ratio.
Here are a few things to consider about this option.
- Leave your revolving credit accounts open once they are paid off. These show you have credit available but aren’t using it which equates to a good credit utilization ratio and a better credit score.
- In many cases, approval will be based on your creditworthiness and debt-to-income ratio, which is the amount you pay monthly toward your debt divided by your monthly gross income. The lower your debt to income ratio, the better your chances of getting approved. A ratio of 35% or less is considered good, according to Wells Fargo.
- Shop around to find the best deal amongst the various available lenders. Ideally, you want to find a lender who can help you cut down on the amount of interest you will pay.
If this sounds like the best strategy for you, SuperMoney's loan offer engine can help you easily access a list of real personalized rates from a variety of lenders without impacting your credit score.
Open new lines of revolving credit
You could also look into opening a new line of revolving credit to lower your overall ratio. For example, say you have one credit card open that has a limit of $2,000 and you have a balance of $1,000 on it, putting your credit utilization ratio at 50%. While you will want to pay the balance on that card down, you could help your overall credit utilization ratio in the meantime by opening up a new line of credit. If you opened a new line with a $2,000 credit limit, you would decrease your overall credit utilization ratio to 25%.
Original total credit utilization ratio:
- Credit limit: $2,000
- Balance: $1,000
- Credit utilization ratio: 50%
New total credit utilization ratio:
- Credit limit: $4,000
- Balance: $1,000
- Credit utilization ratio: 25%
Keep in mind, though, that to have the best effect on your credit score, you should still work on getting the original credit card balance down to the 30% ratio. Once it is, you will be in good shape and could spend up to $1,000 of your new credit line.
As you can see, you can get creative in how you manage your ratio. However, Experian warns if you take this route of opening a new credit line, you need to be mindful of the following factors:
- Lenders often perform a hard pull on your credit report. Too many hard inquiries will hurt your credit score.
- The number of credit accounts you have and the mix of credit types you have. Your credit mix is also considered when calculating your credit score and having a balance of both revolving and installment credit types is recommended. If you have too many revolving accounts open, that will hurt your score.
- Lastly, having another open credit line can make it tempting to overspend, so you want to ensure you will manage it responsibly.
With all of this in mind, you can weigh your options and decide whether this is the right strategy for you. If you’d like to shop for new revolving credit accounts, you can check out a range of credit card providers, what they offer and what past customers say on our Personal Credit Card Review page.
Lastly, a balance transfer may be able to help. If your overall ratio is at or below 30% but your individual credit line ratios are not, you could also consider transferring a balance between credit cards. You will have to look at the balance transfer fees charged by your lender to see whether it will be worth it. Furthermore, you want to ensure you aren’t going to put the card taking the balance over its 30% limit. While this won’t affect your overall ratio, it can help on your individual credit line ratios which Experian says are also taken into consideration. Learn more on whether you should do a balance transfer.
|Card||0% APR Intro Period||Balance Transfer Fee||Regular APR|
|21 months||3% or $5||14.49% - 24.49%||Apply|
|18 months||3% or $5||14.49% - 24.49%||Apply|
|18 months||3% or $5||11.99% - 23.99%||Apply|
If the balance transfer fees are too high on your existing card, you could also consider using the new credit line strategy mentioned above to open a new credit card with a balance transfer promotion. Some companies will offer no interest or fees on balance transfers for a set period of time. This can help you pay down one card at a low cost, as long as you pay off the balance you transferred within the promotional period. However, with this option, you will also want to heed the warnings from Experian about opening a new credit line.
Why is credit utilization important?
Credit card utilization is important because it shows how a borrower manages the credit extended to them. Imagine there are two people who receive a loan for $1,000. The first person goes out and spends it all within three days. The second person spends $200 over the course of a month.
What do you think about the first person and their money management skills? Does their behavior make them seem responsible? Would you trust them with a loan? What about the second person? Who do you think is more likely to pay back the money?
According to Experian, the credit scoring models have determined the second person is more trustworthy. Borrowers like person No. 2 demonstrate less risk to lenders because they don’t borrow as much as they can but instead demonstrate self-control and responsibility.
Manage your credit utilization and increase your credit score
These strategies can help you lower your credit utilization ratio so your credit score improves. As a result, you will be able to get better rates and higher loan amounts in the future. Not only that, a good credit score can help you save on life insurance costs and even can be a factor in getting a new job. Weigh the pros and cons and choose the best fit for your situation.