As you go through multiple sources giving you tips to get the most out of your credit card, you might have come across several who tell you to keep your ‘credit utilization ratio’ on the lower side. For this, it would be important to understand what this ratio means and how is it important to your financial health. Credit utilization ratio is the ratio of the outstanding balance on your credit card to the total credit limit available on the credit card.
This means that if you do not have any outstanding balance on your card, your credit utilization ratio ends up being zero. This ratio has a major impact on your credit report in that a low credit utilization ratio results in a positive credit report and a higher ratio results in a lower credit score and a negative report. Therefore, keeping a lower credit utilization ratio is healthy for your credit score and given below are tips for easily doing it.
Ways to Lower Your Credit Utilization Ratio
Increase the Credit Limit on your Credit Card
When you increase the credit limit made available to you, you automatically decrease the credit utilization ratio on your card. This can be done by contacting your credit card issuer or bank and requesting an increase in your credit limit. Some of the banks may allow you to do so just by logging into their netbanking portal and provide you an option to request an increase in your credit limit there. However, you can only request an increase in your credit limit. Whether it will be granted or not remains at the sole discretion of the bank. You can also increase your credit limit by applying for a new credit card with zero or a very low annual fee. In both cases, a hard enquiry is conducted on your financial profile which may result in a slight dip in your credit score which goes up once the card application or request for increase in credit limit is approved.
Decrease the expenses on your credit card
The primary way to decrease your credit utilization ratio is to just keep the expenses and spending on your credit card below the 30% limit and not spend below that on your credit card. This does not mean that you cannot make a big ticket purchase once in a while, but if you do so for each month or billing cycle, it can get even more difficult to lower our credit utilization ratio. You can cut down on your credit card expenses by shifting them to a debit card or a credit card that you do not use on a regular basis.
Pay back the Outstanding Balances on your credit card
Higher the amount of outstanding balance on your credit card, higher will be the credit utilization ratio on it. Therefore, it is important to pay off the outstanding balances of previous months. However, it is important to note that the clearing of previous months’ balances may not reflect on your credit report and credit score immediately. It may take some time for your credit score to increase after you pay back the revolving credit. After the outstanding balance has been paid back, you might want to wait two or three months before you make a big purchase again. If you have a high credit utilization ratio at present, you may want to pay back the outstanding balance on the credit card and keep the expenses on the card on the low for a few months.
Track Your Expenses on a Regular Basis
The first step to lowering your credit utilization ratio is to keep a check on the spendings made from your credit card. Therefore, as a credit card user you must make it a routine habit to keep a tab on the credit card expenses and be aware of the total spending. This can help in keeping the credit utilization way below the credit limit. If you do so, you get to know whenever you are about to go over the 30 to 40 percent limit on the credit card. This can be an indication to cut back on your credit card spends for the month.
Do not Close Old or Unused Accounts
Many users tend to be in the habit of closing credit cards that they no longer use. However, it might be better if you keep the credit card account open because the unused credit limit on that credit card can be a factor in reducing your credit utilization ratio as a whole, given that no spends are being made on that credit limit. This will further lead to an increase in your credit score. On the other hand, if you close an old credit card, it might lead to shortening of your credit history, thus leading to a decrease in your credit score. Therefore, if the credit card happens to be a lifetime free card with no annual charges, it would be better to leave the credit card account open.
When you manage your credit utilization in a responsible manner, it automatically leads to the responsible maintenance of your credit score and history. A decrease on your credit card balance and an increase in your credit limit will eventually lead to the lowering of your credit utilization ratio, thus having a positive impact on your credit score. This makes you eligible for loans and other modes of financial assistance at much better rates of interest.