Tips to Lower Your Credit Utilization and Improve Your Credit Score

Tips to Lower Your Credit Utilization and Improve Your Credit Score

Reducing your credit utilization is one of the fastest ways to improve your credit score, often showing results in just a few weeks.

What is Credit Utilization?

Credit utilization is the percentage of your total available credit that you are currently using.

To calculate your credit utilization, add up the balances on all of your credit cards and divide that sum by your total combined credit limits. For example, if you have a total balance of $500 across your cards and a total combined credit limit of $1,000, your credit utilization rate is 50%.

Ideally, you should keep your total credit utilization below 30%. Keeping it below 10% is even better for achieving an excellent score.

Why Does Credit Utilization Matter So Much?

1. It is a major scoring factor: Credit utilization accounts for roughly 30% of your FICO® Score and VantageScore. This makes it the second-largest factor in your credit score, trailing right behind your history of on-time payments.
2. It updates frequently: Credit card companies typically report your balances to the three major credit bureaus (Experian, TransUnion, and Equifax) every month. This frequent reporting means changes in your habits can quickly and positively impact your score.

Here are four effective ways to reduce your credit utilization from a financial wellness perspective:

1. Monitor and Reduce Your Monthly Expenses

The most direct way to lower your utilization is to reduce the amount you charge to your cards.

• Use cash or debit: Shift daily expenses to your checking account or cash when you are close to your threshold.
• Set up balance alerts: Log into your mobile banking app and set alerts to notify you when your card balance reaches 30% of your limit.
• Stick to a budget: Build a monthly budget to track your spending habits and avoid relying on credit cards for everyday costs.

2. Pay Your Credit Card Bill More Frequently

You do not have to wait for your monthly statement to make a payment. Making multiple smaller payments throughout the month keeps your reported balance low.

• Beat the reporting date: Credit card issuers usually report your balance to the bureaus on your statement closing date, not your payment due date. If you pay your balance after the statement generates, a high utilization rate has already been reported.
• Make bi-weekly payments: Making a payment every two weeks or right after you get paid ensures that the balance reported to the credit bureaus stays consistently low.

3. Use a Credit Union Personal Loan to Consolidate Debt

Moving credit card debt to a personal loan changes how the debt is viewed by credit scoring models.

• Drop utilization to 0%: Revolved credit card debt heavily impacts your utilization score. Personal loans are installment loans, which do not count toward your revolving credit utilization ratio.
• Save on interest: Credit unions typically offer significantly lower fixed interest rates on personal loans compared to high-interest credit cards.
• Commit to the plan: Debt consolidation only works if you stop using those credit cards for new purchases while paying off the loan.

4. Keep Your Unused Credit Cards Open

It can be tempting to close a credit card account once you pay it off, but doing so can accidentally harm your score.

• Preserve your limit: Keeping an unused card open keeps its credit limit active in your total pool of available credit, which naturally keeps your total utilization percentage lower.
• Protect your credit age: Older accounts look good to lenders. Closing an old card shortens your average credit history over time.
• Remove temptation safely: If you are tempted to spend, lock the physical card away in a safe place or freeze the card in your mobile banking app rather than closing the account.

By practicing these habits and maintaining consistent, on-time payments, you will build a stronger financial profile and see steady improvements to your credit health.