Best credit utilization ratio: what is it and how to get there?

Anyone that wishes to keep a good credit score should rethink their relationship to the credit card. While making as many purchases as you want in almost no time is really fun, having foresight is an important part of getting ready for your future financial needs. 

We must always remember that, as long as your credit score is high, you can get loans and even finance a mortgage becomes easier. So let’s get started and understand what a credit utilization ratio is, how it impacts your life and what are the best numbers you could get. 

What is a credit utilization ratio? 

Credit utilization ratio is the percentage number that shows how much of your available credit you are currently using. Take someone with a US$500 credit limit for an example. After this person uses US$250, there is a 50% utilization ratio. Quite simple, right? 

Well, it gets a bit more complex as people get more and more credit cards throughout the years. Each card counts for the utilization ratio, making it a bit harder to keep track of. Creditors take all of these amounts in consideration before allowing simple services, such as a loan or some types of insurance. 

Some types of scores also take into consideration other loans and mortgages in the utilization ratio. Considering that this factor corresponds to 30% of your score, this is something to keep in mind while shopping. 

What is revolving credit?

Do you know about revolving credit? A utilization ratio only considers this type of credit, also known as something that doesn’t have an expiration date. When you make a purchase on your credit card you don’t have to pay this month. It’s ok to wait a couple of months to pay, but it’ll cost you extra in interest. That’s why it’s called revolving, it revolves monthly until you pay everything off. 

Monthly you have the choice to borrow money against your credit limit. Every time that you pay what you borrowed, that can happen again, and again, and again forever. Or for as long as you keep that credit line open, anyway. 

Does utilization per-card matter?

It certainly does and it’s also one of the factors that credit card users forget the most. You might think that the best strategy to avoid buying more than you can afford on a card is by keeping every expense on it. However, that will just make your utilization ratio higher, since it affects the percentage. 

Let’s just say that using 90% on a card and 30% on another doesn’t make things more balanced. Banks consider both per-card utilization ratio and overall utilization ratio. So the ideal is to avoid getting close to maxing out any of your credit cards. 

When you notice that spending went a little overboard on a card, try to pay the bill early and spread  things more evenly on the next month. 

How to calculate your credit utilization ratio?

Per-card credit utilization ratio is rather simple to calculate. The total credit limit is 100%, your ratio is how much of that limit is left. So on a US$10.000 limit card that has US$5.000 of purchases on it, there’s a 50% ratio. 

Now let’s calculate your overall ratio. For that, you have to add up all of your limits. When you doubt, just log onto your card’s app or site, they’ll have the limit on display at the first page, sometimes even with the amount you used for the month.  

It’s time to add up every credit card balance you might have and do a simple mathematics account: Current debt divided by overall credit limit, multiplied by 100. That’s the credit utilization ratio percentage. 

If you’re curious enough to go back and compare this number with the ratio for each card, you’ll see that adding each card up won’t get you the same result. That’s why you must first add all of your limits and then your debts. 

What should your credit utilization ratio be? 

When you have a high credit utilization ratio that bank understands that you can compromise less of your income with other debts. This will give you a lower credit score and less access to financial services. But how much is too much when it comes to credit cards? 

FICO officially recommends that you keep your utilization below 30%. So someone who has a card with a US$1.000 limit should avoid using more than US$300. If an emergency comes up and you have to use more than 30% make sure to pay it off as soon as possible. 

Credit card companies don’t report these numbers to bureaus daily. This means that you have some time to pay your balance, but don’t take too long or your score will be at risk. 

Is opening new cards a good idea to get a better credit utilization ratio? 

Some people attempt to get a better credit utilization ratio by opening new accounts. The logic behind it is quite simple: the new card will have a 0% ratio and some limit that adds up with your old one. This way, the overall ratio should fall, even if the per-card ratio remains mostly unaltered. 

It seems an easy solution, but one that most financial advisors won’t recommend unless it’s a last resource. In the short term, getting a new account actually impacts your score negatively. When a financial firm checks your score it gets reported and might lower the numbers. 

Another problem is having too many credit cards when you have poor variety in your credit mix. For some people that is also a temptation to overspend and lose track of their finances. 

Is the credit utilization ratio affected by closing a card? 

Since opening a new credit account can impact your score for better or worse, what effect does closing one have? Considering the short term effects, it’s pretty negative since you’ll have less credit limit available and an immediate raise in ratio. People that owe nothing in cards shouldn’t worry, since a 0% percentage will remain so no matter how many cards you have. 

Another possible problem happens when you decide to close an old credit account. It counted as part of your credit history, which is now gone. If you have old cards that have close to zero fees and no limit utilization, it’s better to keep them.

Best tips to decrease credit utilization ratio

Are you worried about your credit utilization ratio? There are some techniques that can help you bring those numbers down. All that you need is some control and to keep reading. A good side of lowering your ratio is that this is one of the fastest ways to get a better credit score. 

1. Pay what you can early

Sadly, there is no trick to get a better ratio without paying what you owe. Our tip to any big credit card spenders out there is: whenever possible, pay early and sometimes more than once a month. That is the best way to make sure you don’t get your data reported when you get above 30% of your limit. 

This is also a great financial tip to save money. As long as you keep paying before the month is up there won’t be any interest rates. 

2. Track your credit card utilization 

Sometimes we just make payments on whatever card we used less that month. This is a big mistake! Make it a habit to actually check your utilization before you make a purchase so that you won’t get close to more than 30% on any of them. 

Credit cards that have apps are especially practical, since they allow you to check your limit in real time wherever you are. 

3. Request higher limits 

This can also help a lot. The higher the limit the lower your ratio will be, as long as it’s combined with lower spending. But you must be careful to avoid the temptation of buying more! Otherwise this is actually a trap that could compromise your finances in the long run. 

4. Keep track of the reporting for credit bureaus

Sometimes you end up with a high ratio even after paying all of your bill. This happens often when the credit card issuer reports your data before the end of your billing cycle. To solve the issue you must find out when the reports happen and pay up before that. 

The solution is quite simple: give your creditor a call to find out when that happens. With the information on hand you can pay in advance as often as possible. Afterwards you’ll see a quick increase in your credit score. 

5. Set up alerts on your app

Is forgetfulness your greatest foe when it comes to keeping a good utilization ratio? Many credit card apps have the option of setting up reminders and alerts when the due date is arriving. Sometimes you can even leave the payments on autopilot, so that there’s no chance of actually missing the date.