Do These 6 Things Now To Fix Your Credit Utilization Before Your Next Big Purchase
If you’re applying for a home mortgage or auto loan, your credit score can mean the difference between a good rate and a bad one.
But one of the most important individual components of your credit score is something you might not even think about: Credit utilization.
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Here's how to fix it before it costs you.
Why Credit Utilization Matters
Credit utilization is simply the percentage of your available credit you're currently using. It’s a big deal because it amounts to 30% of your FICO score, the second-biggest factor after payment history, according to myFICO. To minimize the negative effect on your credit score, you’ll want to target a credit utilization of less than 30%. The people that get the lowest rates on loans usually have a utilization well under 10%.
How much of your credit is in use matters even if you’re not taking out a loan. Landlords, for example, will run your credit for lease applications, and in some states, insurers can use your credit score as a factor in determining premiums.
How To Improve Your Credit Utilization
Long before you make a big purchase, you should take active steps to improve your credit score and utilization. Here’s how.
1. Check Both Numbers
Utilization gets calculated two ways, according to myFICO: Aggregate, meaning all your balances divided by all your limits, and per-card, meaning each individual card's balance against its own limit. A single card with a 90% utilization can drag down your score even if your overall credit usage looks fine.
2. Pay Down Balances Before the Statement Closes
A great way to knock down your utilization is to pay off your card before your statement date, not your due date. Card issuers report your balance to the credit bureaus on your statement date, so even if you pay your card in full every month before the due date, your credit report will show that you’re always carrying a balance. This one adjustment can drop your reported utilization dramatically without changing your actual spending habits at all, according to Experian.
3. Ask for a Credit Limit Increase
Even if you never intend to spend more money on your credit card, Experian says you can improve your utilization by asking for an increase to your limit. Since utilization is a ratio, if your balance stays the same but your limit increases, your credit utilization percentage will fall.
4. Spread Balances Instead of Stacking Them on One Card
If you're carrying a lot of debt, try to spread it out among different cards, per myFICO. One card maxed out at 95% will hurt more than having three cards with a 30% utilization, even if the total balance remains the same.
5. Leave Old Cards Open
Closing an old credit card can actually hurt your credit score because it reduces your total available credit, per Experian. If you carry any balances, that can increase your utilization even if your balances don’t change. The caveat is that you shouldn’t keep paying an annual fee on a card that you never use.
6. Avoid Applying for New Credit
Each new credit application triggers a hard inquiry, which can knock down your score by a few points. New accounts can also reduce your average account age, which also works against you, according to myFICO. As a side note, some lenders might also be more reluctant to offer you a loan if you’ve been actively seeking new credit.
The Bottom Line
A good credit score can save you hundreds or even thousands of dollars in interest if you’re financing a big purchase. Your credit utilization plays a big role in determining your score, so it’s important to keep it under control. Before you take out a mortgage or car loan, check to see what you can do to improve that ratio rapidly and save yourself some money.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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