One of the most vital elements of a credit report is the Credit Utilization Ratio. Credit utilization can be described as the percentage of credit limit that you’re currently utilizing. Say, for instance, if you have a total of Rs. 1,00,000 in credit available on two different Credit Cards, and you’ve spent Rs. 70,000 against it (50,000 on one card and 20,000 on the other), your Credit Utilization Rate is pegged at 70 percent. This entails that you’re not only using more than half of the total credit available, but also maintaining a negative Credit Utilization Ratio. Ideally, you should look to maintain a Credit Utilization Ratio at 30 percent (or less) or else it can seriously damage your Credit Score.
Whether you seek loans or the Best Credit Cards on attractive interest rates, you need to lower your Credit Utilization Ratio. Shared below are a few tips on how to lower Credit Card utilization ratio.
1. Decrease your spending
First things first, to reduce your Credit Card debts and Credit Utilization Ratio, stop using your Credit Cards immediately and put a halt to your spendings.
By continuing to spend indiscriminately on purchases without being able to pay off your existing debts, your Credit Utilization will continue to rise. Instead, try making cash payments till the time you aren’t able to lower your utilization rate.
2. Pay down or clear your debts early
You should ideally try to maintain a 30 percent threshold at all times. One way to do that is by making sure to pay down some of your existing debts, especially if you have previous outstanding balances. Another point which needs to be made is that once you have paid down these debts, you should wait for a couple of months at least before making and new big-ticket purchases. Remember, maxing out your Credit Cards is possibly the worst thing that you can do for your utilization ratio.
3. Increase your credit limit
Increase the amount of available credit you have by calling your Credit Card’s issuer to request for a credit limit increase. This is another sure-shot way of improving your Credit Utilization Ratio. There will be certain criteria which you will need to meet, which depends on your previous history with the company, your existing credit score along with other parameters. In that regard, if you’ve had a history of making late payments, then it’s highly unlikely that your request for a credit limit increase will be approved. Additionally, if your request for a credit limit increase has been sanctioned, make sure not to use the additional credit as you need that extra credit to improve your Credit Utilization Ratio.
4. Pay off your Credit Card balances with a Personal Loan
Taking a Personal Loan is another method to pay off the outstanding balance on your Credit Cards and thereon, improve your Credit Utilization Ratio. While taking an additional loan might sound counterproductive, it’s important to remember that the interest rates on your Personal Loan will be significantly lower than your Credit Card. Moreover, paying off your outstanding balances will open up your credit limit instantly. That said, it might take time for this to reflect on your credit report.
5. Open a new Credit Card
Another effective way of reducing your Credit Utilization is by increasing your available credit. You can do this by applying for a new Credit Card. For example, some SBI Credit Cards come with zero or low annual fee while certain types of Citibank Credit Cards have generous credit limits. That said, ensure that you don’t use the new Credit Card as the primary purpose of getting a new card is hiking your usable limit.
6. Don’t close unused cards
Ensure that you keep your old Credit Cards active by using them every now and again. Even if you don’t use your old SBI Credit Cards any longer, you should consider keeping it open as the idle limit on your unused Credit Cards will help in lowering your Credit Utilization Ratio. In the event you close a particular Credit Card, your total available credit amount also gets hampered thus resulting in your Credit Utilization Ratio increasing– which is precisely what you need to avoid doing. Moreover, closing old Credit Cards will also shorten the life of your credit history, which would again cause a negative impact on your credit score.
7. Schedule Credit Card payments more often
Scheduling multiple payments in a month can help in lowering your Credit Utilization Ratio. In most cases, your balances and payment activity is reported to Credit Bureaus once every month. However, the chances are that the date your activity is reported might not coincide with your payment. In such cases, if your outstanding balance is high, inadvertently your Credit Utilization Ratio will also be reported as high– even if you pay on time. However, by making multiple payments through the month, the likelihood of you being reported with a lower utilization rate increases exponentially. Thereon, you should try to schedule your bills on auto-pay so that you don’t miss a payment to avail the benefit of lower credit utilization. The focus should always be on keeping your Credit Card balance below 30 percent of your credit limit.
8. Make More Than the Minimum Payment
Always look at maintaining the utilization between 10 percent to 30 percent. One way of doing so is always paying more than the minimum payment mandated at the end of the billing cycle.
9. Keep Track of Your Expenses
You should ideally have a sense of the details of your financial life. In that light, always be cognizant of your spendings and keep an eye on your credit limit. Make it a regular habit to check your Credit Card balances online so that you’re aware of your spending habits. By doing this, you will have a better understanding of when to stop using your Credit Cards so that you can start paying your balances well before your statement date and, in turn, free up your credit limit. Remember, a vital component of getting your Credit Utilization Ratio down is by staying in the loop with your spending and your payments.
The Bottom Line We hope that by following the above-mentioned tips, you will be able to lower your Credit Utilization Ratio, thus improving your credit score in the bargain. A high Credit Utilization Ratio is indicative of using too much credit and may negatively impact your chances of getting better rates and obtaining higher loan amounts in the future. Hence, there is an inherent need to maintain an optimal Credit Utilization Ratio and a good credit score.