Credit cards can be wonderful tools if you know how to use them to your advantage. For example, you should use them in a way that helps boost your credit scores—which will, in turn, help you qualify for the best cards with the best perks and rewards.
One key thing to keep in mind while using your credit cards is to make sure you’re not using too much of your own credit. If you do, you’ll end up with a higher credit utilization ratio, which can pull your credit scores down.
In general, the less of your available credit you’re using, the better: Aim to use no more than 30% of the credit available to you. For the best credit scores, keep it under 10%, but above zero.
How Do I Calculate My Credit Utilization Ratio?
Your credit utilization ratio is calculated by adding all your credit card balances at any given time and dividing that by your total credit limit. For example, if you typically charge about $2,000 each month, and your total credit limit across all your cards is $10,000, your utilization ratio is 20%.
To figure out your average credit utilization ratio, look at all your credit card statements from the last 12 months. Add the statement balances for each month across all your cards and divide by 12. That’s how much credit you use on average each month.
Then, add up the credit limits across all your cards. If that number is 10 times or more than your average monthly balance, your credit utilization ratio is 10% or lower—which makes you eligible for the best credit scores.
What Credit Utilization Ratio Should I Aim For?
Experts say that most credit scoring models ding your score if your utilization ratio is above 30%. So it’s smart to aim for a utilization ratio under that—but don’t expect your score to magically jump up if your utilization is at, say, 29%.
(Americans average a 30% credit utilization ratio, according to Experian’s 2017 State of Credit survey—though millennials and Gen X-ers are a bit higher at 37%, which is one reason their scores are lower overall.)
Think of it as more of a sliding scale. The higher your utilization ratio, the more your credit scores will take a hit. To be on the absolute safe side and achieve the absolute best scores, you’ll need a credit utilization ratio of 10% or less.
How Do I Reduce My Credit Utilization Ratio?
There are two ways to bring your credit utilization ratio down: Either spend less on your credit cards or increase your credit limits. (You can also do both.)
Spend Less On Your Cards
This is often easier said than done. But if you can shift some of your spendings from your credit cards to, say, debit cards or cash, your utilization ratio will go down.
Another trick you might want to try: Pay off your credit card in full during a billing cycle before your statement generates. For example, if your billing period closes on the 29th of the month, pay off any charges you made by the 28th. Your card issuer typically reports credit activity to the credit bureaus once a month, after the statement generates. If you’ve paid off what you’ve charged before that, your utilization ratio will remain low.
Increase Your Total Credit Limit
If you can’t or don’t want to cut down the amount you put on a card each month, consider applying for a new credit card or asking your current issuers for a credit limit increase. The catch: You won’t know in advance how much credit they’ll extend to you on a new card—or on a limit increase—so you may have to go through a trial-and-error process to get to the total credit limit you want.
(And remember, your credit scores will also take a small, temporary hit whenever there is a hard inquiry on your credit report—like when you apply for a new card or sometimes when you request a limit increase—but most such dips are temporary and recover quickly.)
Also, be mindful to not use any additional credit extended to rack up credit card debt. If you’re worried you may overspend, you might want to reconsider before increasing your limits and take another look at your budget to find any ways to cut expenses.