The Do's and Don'ts of Credit Utilization: An Ultimate Guide

Hey there 👋, welcome to my guide on everything credit utilization! I’m your friendly neighborhood finance expert, and I’m here to help you navigate the world of credit. In this guide, I’ll be covering the Dos and Don’ts of credit utilization in detail so that you can use credit to your advantage and avoid any unwanted pitfalls.

What is Credit Utilization? 🤔

Credit utilization is the ratio of your credit card balances to your credit card limits. In simpler terms, it is the amount of credit you use compared to the credit available to you.

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

Now that we have established what credit utilization is, let’s dive into the Do’s and Don’ts!

The Do’s ✔️

Do Keep Your Credit Utilization Rate Low

One of the most important Dos of credit utilization is to keep your credit utilization rate as low as possible. A lower utilization rate leads to a higher credit score, making it easier for you to get approved for credit in the future. It is generally recommended to keep your utilization rate below 30%.

Do Pay Your Balance in Full

Paying your balance in full and on time every month is the best way to avoid interest charges and keep your credit utilization rate low. It is easy to get into the habit of paying the minimum amount due, but this can lead to high-interest charges over time.

Do Increase Your Credit Limit

If you are struggling to keep your credit utilization rate low, consider asking your credit card issuer for a credit limit increase. This increase can give you more available credit, which can lower your utilization rate.

Do Monitor Your Credit Report

It is essential to keep an eye on your credit report to ensure that no errors or unauthorized transactions affect your credit utilization rate. You are entitled to a free credit report from each of the three credit bureaus every year. Take advantage of this and monitor your report carefully.

Do Consider a Balance Transfer

If you have a high credit card balance and cannot pay it off right away, consider a balance transfer to a credit card with a lower interest rate. This move can help you save money on interest charges and pay off the balance more quickly.

The Don’ts ❌

Don’t Max Out Your Credit Cards

Maxing out your credit cards often leads to a higher credit utilization rate, which can harm your credit score. It is best to keep your balance low and avoid letting it reach your credit limit.

Don’t Close Old Accounts

Closing old credit accounts can harm your credit score, as it lowers your available credit. Even if you don’t use an older card anymore, keep the account open and use it sparingly to maintain a positive credit history.

Don’t Apply for Too Many Credit Cards at Once

Each time you apply for a credit card, a hard inquiry is conducted on your credit report, which can lower your credit score. Limit the number of credit card applications you submit to avoid too many hard inquiries on your credit report.

Don’t Carry a Balance

Carrying a balance on your credit card can lead to high-interest charges, which can snowball over time. It is best to pay your balance in full and on time each month to avoid these charges.

Don’t Ignore Your Payments

Ignoring your credit card payments can result in late fees, interest charges, and damage to your credit score. Always make your payments on time, and if you can’t make the full payment, pay at least the minimum amount due to avoid any negative consequences.

And that’s a wrap! By following these Do’s and Don’ts, you can use credit to your advantage and avoid any unwanted pitfalls. Remember always to use credit responsibly and make payments on time to maintain a healthy credit score.