Overview
Your credit utilization ratio represents the percentage of available credit that you’re using. For example, if your available credit is $3,500, then $350 amounts to 10% of your available credit. Ideally, you would keep your credit utilization ratio below 30%. This may positively impact your credit score. Generally speaking, the lower your credit utilization ratio, the better.
However, high expenses may be unavoidable. In this article, we will review five powerful tips to help lower your credit utilization ratio. If you cannot meet your immediate expenses, apply for a personal loan via LendProConnect. We don’t check credit scores or credit reports during the online application process.
Tip #1: Ask for a Credit Limit Increase – Don’t Increase Your Spending
You may want to ask for a credit limit increase. If you are eligible for a credit limit increase, it is usually just a matter of calling the bank. Once your credit limit increases, don’t immediately increase your spending! In fact, keep your spending the same. For example, if your credit limit was $3,500 and goes up to $5,000, $350 goes from 10% of your available credit to 7% of your available credit. This is a markedly lower ratio. Whatever the exact numbers, the principle is the same: equal spending + greater spending room = lower credit utilization ratio.
Tip #2: Keep Your Credit Card Balances as Low as Possible
A high credit card balance is likely to result in a high credit utilization ratio. Keep your credit card balances as low as possible. This may require prioritizing your fixed expenses and lowering your variable expenses. You may choose to pay with your debit card or postpone significant expenditures. Consider using cash to pay for everyday necessities.
Tip #3: Avoid Lifestyle Creep
Lifestyle creep is the phenomenon of increasing your spending as your income increases. It is problematic as it may prevent saving or wealth accumulation. For example, if someone goes from making $18 per hour to $25 per hour in Ontario, they may start spending a little more, buying coffee outside or dining out more often, instead of putting the additional income toward fixed expenses or savings. By keeping your spending relatively the same despite a higher income, you will be able to avoid lifestyle creep.
Tip #4: Make Micro Credit Card Payments
Are you paying the entire credit card balance at the end of each month? That may result in a higher credit card balance and a higher credit utilization ratio. There may be a smarter way. Consider making micro payments on your credit card(s) throughout the month to lower your overall balance.
Tip #5: Review Your Budget
Look at your income and expenses, especially your variable expenses. For example, you may consider brewing your own coffee at home or cooking your own meals at home. You may want to follow a budget method such as the following:
- Zero-based budget: This budget has you allocate every single dollar of your income to a specific purpose e.g. rent, groceries, car repairs, etc.
- Envelopes: This old-fashioned method has you label envelopes with the corresponding spending category and put all the cash you’re going to spend in that category that month in that envelope. This prevents you from overspending in any of the categories.
- 50/30/20: This budget has you spend 50% on needs, 30% on wants, and 20% on saving, which may be unrealistic. However, deciding on a percentage of income for each spending category is more helpful than having no idea how much you spend in each category.
The key is to pick a budget system that works for you and stick with it over the long term.
Final Thoughts
Adhering to the above strategies may help you achieve a lower credit utilization ratio. However, these strategies require long-term persistence and strategic implementation.
If you need fast funds, apply for a personal loan via LendProConnect. We offer a simple and fast online application, without a credit check!
