When to Increase or Decrease Your Credit Utilization: A Practical Guide

Hey there! 🤗

Are you new to the world of credit utilization? Don’t worry, I got you! This practical guide will help you understand when to increase or decrease your credit utilization. Let’s dive in!

What is Credit Utilization?

Before we discuss when to increase or decrease your credit utilization, let’s understand what it means. Credit utilization is the percentage of your available credit that you’re using. It’s calculated by dividing your credit card balance by your credit limit.

For example, if you have a credit limit of $10,000 and a balance of $5,000, your credit utilization is 50%.

Understanding credit utilization is essential because it affects your credit score. Your credit score is affected by the credit utilization ratio of each credit card as well as the overall credit utilization ratio across all your credit cards.

💡 Tip: It’s recommended to keep your credit utilization below 30%. Anything above that can negatively affect your credit score.

When to Increase Your Credit Utilization

There are times when you might want to increase your credit utilization. Here are a few instances:

1. Building Your Credit History

If you’re new to the credit world, you may have to build your credit history. One way to do that is by using credit responsibly and keeping a low credit utilization ratio. However, a zero credit utilization ratio doesn’t show that you’re using credit. Therefore, it’s recommended to keep a small balance and pay it off every month to show responsible credit use.

2. Meeting Credit Card Bonuses

Many credit card companies offer bonuses if you spend a specific amount within a given timeframe. In such cases, you might have to increase your credit utilization ratio to meet the spending requirement and earn the bonus.

3. Increasing Your Credit Score

Believe it or not, but increasing your credit utilization can actually help your credit score. If you have a low credit score due to having no credit history, increasing your credit utilization can show credit agencies that you’re capable of using credit responsibly.

When to Decrease Your Credit Utilization

There are times when you might want to decrease your credit utilization. Here are a few instances:

1. Paying Off Debt

If you’re carrying debt, decreasing your credit utilization is a great way to lower your monthly payments and pay off your debt faster. By reducing your credit utilization ratio, you’ll be able to lower the amount of interest you’re paying.

💡 Tip: If you’re carrying high-interest debt, it’s recommended to pay it off as quickly as possible.

2. Preparing for a Large Purchase

If you’re planning to make a large purchase, such as a house, car, or education, decreasing your credit utilization can help you get a better interest rate. A higher credit score can lead to lower interest rates, which can significantly reduce the overall cost of the purchase.

3. Showing Responsible Credit Use

Keeping your credit utilization ratio low shows responsible credit use and can significantly impact your credit score. If you’re not planning on making any significant purchases but want to maintain a good credit score, keep your utilization low.

Wrapping Up

Credit utilization is an essential aspect of maintaining a healthy credit score. It’s essential to understand when to increase or decrease your credit utilization ratio. Increasing it can help build your credit history, meet credit card bonuses, or increase your credit score. Decreasing it can help pay off debt, prepare for a large purchase, or show responsible credit use.

Now that you understand credit utilization better, go forth and use credit responsibly. 💸