When it comes to calculating your credit scoresthe three major credit bureaus—Experian, TransUnion, and Equifax—may use very different formulas for different situations, but all scores take into account the same basic credit factors like payment history, credit mix, and the age of your accounts.

One important element of your credit score that may not get as much attention as others is your credit utilization ratio. This is a percentage based on the amount of available credit you are currently using. Your credit ratio can change from week to week or even day to day and can account for up to 30% of your credit score.

Learn how your credit ratio affects your credit scores and how paying your credit card bill more than once a month can help raise your credit score or keep it high.

For more, see how debt consolidation and student loan forgiveness can affect your credit score.

What is the loan utilization ratio?

Your credit utilization ratio is the percentage of your available credit that you use. As a basic example, if you have one credit card with a $1,000 limit and your current balance is $200, your credit ratio is $200 / $1,000, or 20%.

VantageScore will only consider revolving credit or credit card accounts when calculating your credit utilization ratio. FICO will consider your credit score as part of its “Amounts Owed” category, which is how much debt you have in total.

It’s important to remember that VantageScore and FICO monitor your total credit utilization (utilization of balances and credit limits for all your credit cards), as well as the ratios for everyone on your individual accounts. If your overall ratio is moderately low, but one card has maxed out, it can lower your credit score.

Perhaps more importantly, the credit bureaus do not calculate your credit utilization ratio using your current credit card balance. They calculate it using account balances that your credit card issuers report to the credit bureaus. Each issuer has its own system, but the numbers reported are often balances from your monthly statements.

Even if you pay off your credit card balances every month, having a high credit score at any time in your payment cycle can hurt your credit score.

What is a good loan utilization ratio?

“It’s generally recommended that your credit card balances be kept at or below 30% of your designated credit limit,” Bruce McClary, senior vice president of National Foundation for Credit Counselingtold CNET.

While a credit ratio of 30% or less is the general guideline, those who want excellent credit scores will need to keep it even lower. According to the credit rating company Experian“If you’re focused on excellent credit scores, single-digit credit absorption rates are best.”

“The truth is, the lower your balances, the better. The more you carry, the more it can lower your score,” Todd Christensen, education manager at Money Fittold CNET.

But you shouldn’t aim for a 0% credit ratio. Experian also says that “the only way to make sure you have 0% utilization all the time is to refrain from using your credit cards at all,” which could result in the issuer closing the account, reducing your available credit and increase your ratio.

How can I lower my loan utilization ratio?

Since the credit ratio is an expression of borrowed money divided by the credit limit, the main ways to reduce this ratio are to reduce your debt and increase your credit limit. Here are the best ways to achieve this.

Pay your credit card bill twice a month or even more

Credit card companies report your balances to the credit bureaus regularly, and this number often comes from your credit card statements. Even when you pay off your credit card bill every month, if your statement shows a balance that is a high percentage of your credit limit, your credit score will suffer.

If you use your credit card frequently, consider paying it off twice a month or when your balance reaches 30% of your credit limit. Online credit card accounts make it easy to make or schedule as many payments as you like, and you can set up notifications (see below) about your balances.

If you have a $1,000 limit and spend $900 a month on your card, a credit utilization ratio of 90% could affect your credit score. If you pay it off when your balance reaches $300 or three times a month, your credit score shouldn’t be hurt by a high ratio.

Create credit card balance alerts

Most credit cards now allow you to create online alerts for your account, including your balance amount. These can be emails, text messages, or alerts through your credit card website.

To protect your credit ratio, set up a notification whenever your balance reaches 25% of your credit limit. This level of balance will give you some padding to ensure you stay below the recommended 30% ratio.

Ask for a higher credit card limit

Increasing your credit limit will help lower your credit ratio because the amount you owe is now a smaller percentage of the maximum you can borrow. It’s easy to request a credit card limit increase – just call the phone number on the back of your card and speak to a representative.

Before you ask for a higher limit, though, keep a few things in mind. This strategy only works if you don’t increase your outstanding balance. If a higher limit will tempt you to spend more, you might want to think again.

Also, ask your credit card representative if the company will manage a hard credit check before approving your request. While a higher limit will help your ratio, a hard inquiry can hurt your credit score by 5 to 10 points in about a year.

Keep the old credit cards and use them sparingly

If you have older credit cards that you don’t use much or at all, do not cancel them. You will only lower your overall credit availability and hurt your credit score as well as your average credit age.

However, if you don’t use a credit card at all, the issuer may cancel it due to inactivity. Instead, use old cards sparingly, such as making a purchase every few months, to keep your accounts open and your total available credit high.

Once you understand the principles behind your credit utilization ratio, you can use these tactics to lower your ratio and improve your credit score.

For more information on best practices for good credit scores, learn how build credit fast and how to get a free weekly credit report until the end of the year.


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