Are you searching for a way to improve your credit score? The key to a creditworthy credit score is a good credit utilisation ratio. It’s your credit usage ratio against your credit card’s limit. But what is a good credit utilisation ratio? Moreover, how to reach the best credit utilisation ratio? Find answers to these questions and more in this article.
Calculation of Credit Utilisation Ratio
The credit card balance is divided by the card limit to obtain the credit utilisation ratio of each card. And for the overall credit usage ratio, the sum of all credit card usage is divided by the sum of all credit card limits.
Best Credit Utilisation Ratio
An ideal credit utilisation ratio is around 30-40%. Anything above this percentage indicates credit-hungry behaviour. However, you can go over 40% once in a while as only a long-term high credit usage ratio can negatively impact your credit score. But if you strive to maintain the best credit utilisation ratio, you should never overstep the benchmark.
Significant Effect of Credit Utilisation Ratio Over Credit Score
A high credit utilisation ratio puts you in a bad light in front of agencies and lenders. It shows you as an individual whose lifestyle is maintained by taking credits only. On the contrary, a low credit score indicates good borrowing habits and controlled spending behaviour.
If your other areas of the credit report are well-maintained, you may get away with a not-so-good credit utilisation ratio. Otherwise, getting a good credit score without a good credit utilisation ratio is a tough nut to crack.
5 Essential Tips to Achieve Best Credit Utilisation Ratio
Do you believe that your credit utilisation ratio may pull down your entire credit score? Try these 5 proven tips on how to improve the credit utilisation ratio and never get denied for any loan or credit card.
- Multiple Small Payment Instead of One Large Payment
It’s better to make small payments throughout the billing cycle instead of only one big payment at the end of the billing cycle. This is because your bill payment will show due if the credit card company submits the credit report to the bureau before your billing cycle ends. These companies only submit their credit report to the credit bureau once a month.
- Payment of Credit Card Bills by Personal Loan
One way of balancing your credit utilisation ratio is to pay your credit card bills through personal loans. You need to trade carefully in this territory. The benefit here is that the personal loan interest rate is less than the interest rates of credit cards. But if you lack the financial acumen of handling multiple debts, you can be caught in a vicious cycle.
- Higher Credit Card Limit
Another simple trick to improve the credit usage ratio is to avail a higher credit card limit. But in your mind, you must consider a lesser amount or your old credit limit to be your present one. In this way, you will spend far less. So automatically, you will come under the bracket of individuals with the best credit utilisation ratio. Remember, you must have the financial discipline to pull this off.
- Open Credit Cards
What do you do with a credit card you are not using and paid fully? Obviously, you close them. Not anymore! You can significantly increase your cumulative credit usage ratio by keeping the card open and not utilising its credit limit. But don’t get tempted to use that card if you want the best credit utilisation score to reflect in your credit score.
- New Credit Cards
Apply for new credit cards with the sole purpose of reaching a good credit utilisation ratio. It is similar to keeping your fully paid credit cards open as these new cards are also not to be used. But you need to keep in mind to never spend more than you can afford because of new credit cards. Also, having too many credit cards can bring your credit score down.
Hopefully, these 5 tips on how to improve credit utilisation will prove to be your financial boon. But it’s not enough to reach the best credit utilisation ratio once in a while. It needs to be maintained in the long term. Therefore keep checking your credit score.
Also, remember that if you don’t pay your bills on time and manage your debts well, no trick can help you in uplifting your credit utilisation score.