A credit utilization ratio is used by credit reporting agencies to calculate a borrower’s credit score. To calculate your credit utilization ratio, divide your debt by the total amount of credit available to you and multiply this number by 100. A credit ratio should not exceed 30% of your overall credit limit. It is necessary to always keep it below 30% for a good credit score. If it exceeds more than 30%, it will affect your credit score.

If your credit utilization is high, your credit score will get impacted negatively. Conversely, if your credit utilization is lower, your credit score will improve, and you will demonstrate the use of finances.

Moreover, limiting your credit utilization ratio would make it easy for lenders to determine your creditworthiness. The lenders decide to provide you with the loan based on your creditworthiness. Therefore, it would be risky to give a loan to a borrower who has high credit utilization ratio. Therefore, there are fewer chances of repaying the loan on time.

Hence, if you are a beginner to credit cards or involved in high credit card usage, here are some key factors to improve your credit utilization ratio.

Ways to improve Credit Utilization Ratio

Credit cards come with many benefits but spending them carelessly can result in a lot of debt. Below are the 5 essential guiding steps to lower your credit utilization ratio.

Minimize your spending – For a better credit ratio, reduce your spending, and use less of your credit card. Another option is to reduce your credit card expenses by shifting them to your debit card. Also, you can move the expenses to other lower utilization credit cards alternately.

Pay off the outstanding balance on time – Either pay off timely credit card outstanding balances to improve your line of credit and if you find it challenging to repay the remaining balances and debts. Taking a personal loan will be an ideal option for repaying the outstanding credit card balance or debt, thus improving your credit card utilization ratio. In addition, once the debt is paid, you have to pay just one loan with a low-interest rate.

Pay more than once a month – Financial institutions and NBFCs report your balances and payment activity to credit bureaus agencies every month. But the date may not match your billing cycle. For example, even if you make the payment on time, if the lender reports one week before your due date, your credit report will exhibit a higher credit utilization ratio. Hence, if you can manage to pay before the date, the bank reports the balances and debts, and you can get the advantage of low credit utilization.

Increase your credit limit – Another option to reduce your credit utilization ratio is to request your lender to increase your credit limit. Whether you will be approved for the credit limit will solely depend on the lender’s decision. Many credit card issuers are ready to increase your limit if the payment record is good. However, it would help if you increased the limit only when necessary, or else this will tempt you to spend unnecessarily, causing more debt.

Never close down your old accounts – If you have old credit cards which are not in use should be kept open because if closed, the average age of your credit card accounts will decrease. Closing down old credit accounts shortens your credit history. Moreover, lenders tend to view borrowers with short credit histories as riskier than borrowers with longer histories. You should close your old credit accounts only when you have no plans to make any significant purchases in the next few years.

Conclusion – The credit Utilization ratio is a vital aspect of your credit score. Hence, if your credit score is low, lowering your credit utilization ratio is one of the most effective ways to get it better. Moreover, if you are a first-time credit card user, you need to keep things in mind mentioned above to sustain a better credit score and, as a result, will be eligible for quick loans.