Credit utilization rate: learn how to improve it

Understand credit utilization rates

If you’re keeping track of your credit score, you’ve probably heard of the “credit utilization rate”. This factor may seem complicated at first glance, but understanding what it means and how to improve it can make all the difference to your financial health.

But what is it and how can you improve it? Let’s explore together how you can optimize this rate, achieve a higher score and open doors to better financial opportunities. Read on to stay up to date!

What is the credit utilization rate?

The credit utilization rate represents the percentage of your credit limit that you are currently using. It is calculated by dividing the total balance of your debts by the total available limit. For example, if you have a limit of $5,000 and a balance of $1,000, your utilization rate is 20%.

Why is this important? Credit agencies use this metric to assess how dependent you are on credit. A high utilization rate can indicate a higher risk for creditors, which can negatively affect your score. The general rule is to keep this rate below 30%, but the lower the better.

How can I improve my credit utilization rate?

Now that you know the details, it’s time to learn how to improve your credit utilization rate. To make the process easier, we’ve listed the main tips that will help you! Check out the list below!

1. Pay your bills on time

This may sound obvious, but paying your bills on time is the first step to controlling your utilization rate. An effective strategy is to pay part (or all) of the balance before the closing date of the billing cycle. This means that the amount reported to the credit agency will be lower, reducing your utilization.

2. Increase your credit limit

Requesting a limit increase can be a quick way to reduce your utilization, as long as you don’t increase your spending. If your income or credit history has improved recently, contact your card issuer to ask for a review. Remember that the increase will only help if you keep your balance low.

3. Distribute your spending between several cards

If you have more than one card, try to distribute your spending between them. Avoiding using more than 30% of the limit on any individual card can also help to maintain a good overall rate. Just be careful not to lose control and accumulate debts in several places.

4. Avoid closing old cards

It can be tempting to close a card you don’t use, but this can decrease your total limit and consequently increase your utilization rate. If the card has no annual fee or additional costs, keeping it open can be advantageous. In addition, old cards help increase the average length of your credit history, another important factor for your score.

5. Make extra payments during the month

You don’t have to wait for the bill to arrive to make payments. Making additional payments throughout the month can reduce the reported balance, improving your rate. Small amounts paid frequently can lessen the impact of interest and better control your debt.

6. Monitor your spending regularly

Using apps or monitoring tools can make a big difference. By tracking in real time how much you’ve spent and how much you have left, it’s easier to avoid going over the recommended limit. Having this awareness avoids surprises at the end of the month.

7. Negotiate with your creditors

If you are facing financial difficulties, consider negotiating better terms with your creditors. Reducing interest rates or even consolidating debts into a loan with more favorable conditions can help you control your use of credit.

Why is this worthwhile?

Maintaining a low utilization rate not only improves your score, but also reflects your ability to manage credit responsibly. A good score can open doors to better interest rates on loans and financing, as well as offering greater financial flexibility in the future.

Improving your utilization rate doesn’t happen overnight, but small, consistent actions make all the difference. The important thing is to have a plan and stick to it, adjusting as necessary.

With discipline and knowledge, you’ll be in control of your credit and your financial future. Finally, remember that if you have the power to improve your financial health, one step at a time!

Written by

Juliana Raquel