Are you worried about your credit score? Credit scores are key to unlocking many milestones, such as buying a new car or a new home. At times, it can feel like there’s a lot to your credit score that you can’t control — however, if you’re able to make regular monthly credit card payments, even at just your minimums, there is something you can control: credit card utilization.
What Is Credit Card Utilization?
Credit card utilization impacts your credit score. It’s one of several factors that contributes to the calculation of that number. Specifically, credit card utilization describes the amount of available credit used on your credit cards, and it’s typically expressed as a percentage.
This percentage shows up in two ways: per individual card, and overall.
What Is the Best Credit Card Utilization Percentage?
Individually, you want to stay below 30 percent utilization for every credit card and for your cumulative score. However, the cumulative percentage is most important when it comes to how your credit card score is affected. Ideally, you’ll be able to hit that number individually and cumulatively.
However, if you’re striving for perfection, know that people with perfect credit scores have a credit utilization average of just six percent.
Credit Card Utilization: Common Pitfalls
As you improve your credit score by decreasing your credit card utilization, it’s crucial to be aware of some common snags, mistakes, and pitfalls that could actually worsen your credit score.
- Beware of interest: if your interest rate is high, or if you lose track of it, your interest accumulation, any other credit card fees, and a small purchase could put you above a 30 percent utilization even though you didn’t realize it. This is especially important if you’re only paying minimums.
- Getting more credit cards: If you’re struggling to pay down your credit cards, getting another card to lower your utilization isn’t necessarily the best answer. That’s because it also lowers your credit age, another important contributing credit score factor.
- Paying only minimums: If you can only afford to pay minimums, do it! However, if you can afford to pay more, paying minimums is a potential pitfall. The longer you take to get your utilization down, the longer it’ll take for your credit score to improve.
- Large purchases: Many people float some or all of a large purchase on a credit card to put it off for a month so they don’t have to pay everything from their bank account. This makes sense, especially when it’s an emergency like a home repair or medical issue. After all, if you pay it before it’s due, you won’t accrue interest. However, your credit score can fluctuate in the meantime because of that utilization. If you’re not planning on using your credit to apply for a loan anytime soon, you’re probably fine — but if you want to apply for a home or auto loan in the next six months to a year, avoid floating large purchases on your credit cards if possible.
How to Improve Credit Card Utilization
You can use a combination of methods to improve your credit card utilization. The impact could take months to show on your official score, so remember that when you start thinking about a new house, new car, or any other major purchase that involves a large loan or a good credit score.
- Pay your balances down: Lowering your balances over time will help you lower that percentage. While it’s not advisable to overextend yourself, do what you can to lower those scores. When possible, avoid using your cards while you’re paying them down.
- Request a limit increase on your cards: Have you been a long-time customer of a credit card? Have you experienced a significant increase in salary recently? Are you always diligent about paying on time? If so, one way to decrease your utilization percentage is to raise the amount you have available. Most credit card companies have a channel available for this on their website — add your current information and click request increase. If you’re teetering near that 30 percent mark and you’ll need to apply for a home or auto loan in the coming months, there’s no harm in trying for an increase as long as you can responsibly avoid overspending.
- Get a balance transfer credit card: Since a new credit card can negatively impact your credit age (another ranking factor when it comes to credit score), you’d have to examine the pros and cons carefully. However, if credit card interest is crushing you, you can consider getting a credit card with 0 percent interest for a set amount of time (usually 12 – 15 months if your credit score is high enough) specifically for the purpose of transferring your debt so you can pay it down without any of your money going to interest. To take full advantage of this strategy, you’ll need to pay off that balance before the interest rate gets applied on the new card.
- Debt consolidation: This strategy involves taking out a debt consolidation loan specifically to pay off your debt. Generally, the loan has a lower interest rate than the annual percentage rate (APR) on your cards. While your loan will show up on your credit report, the credit utilization will go down significantly.
- Use the 15/3 Payment Method: This payment method helps you avoid the utilization penalty you could occur for floating a large purchase. With this method, you’ll want to make a payment around 15 days prior to the date of your statement and again three days before that statement due date. Make sure you pay enough to keep your utilization under 30 percent.
In addition to these tips, you can consider other lifestyle changes to save money and pay down your credit cards. For example, if you’d like to own your own home but don’t have the credit score or down payment just yet, consider a rent-to-home agreement. You’ll be on a path to home ownership while paying down your credit cards and