Unlock Financial Opportunities with This Simple Credit Strategy

Managing your credit cards wisely doesn’t just help you stay on top of your finances; it can also open the door to better financial opportunities, such as lower interest rates on auto or home loans. One key factor in responsible credit card management is paying close attention to your credit utilization. Let’s break down what credit utilization is, why it matters, and some easy steps you can take to improve it.

What is credit utilization?

When you get a credit card, some of the terms can seem confusing at first. One of those terms is credit utilization. Simply put, credit utilization is the percentage of your credit limit that you’ve used. For example, if your credit limit is $1,000 and you’ve spent $500, then your credit utilization is 50 percent (the math: $500 is half of $1,000).

Think of it like a scale: The more you spend, the closer you get to reaching your credit limit, which increases your credit utilization.

Keeping your credit utilization low is important because it can help boost your credit score. Your credit score is a numerical representation of your creditworthiness, based on your credit history. Your credit score helps lenders assess how likely you are to repay borrowed money. Scores range from 300 to 850, with higher scores indicating better credit management.

A higher credit score can unlock financial opportunities such as lower interest rates or higher credit limits, saving you money over time.

By managing your credit utilization wisely, you’re not just improving your credit score; you’re setting yourself up for stronger financial stability and more opportunities down the road.

Ways to improve your credit utilization

Now that you know what credit utilization is, here are some ways to improve it.

Pay down outstanding balances

If you have credit card debt, paying down your balance can lower your credit utilization. Financial experts recommend keeping your credit utilization below 30 percent. For example, if your credit limit is $3,000, try to keep your balance less than $900.

Paying off balances also shows lenders that you manage credit responsibly. People in the highest credit score range tend to have credit utilization rates in the single digits.

Request a credit limit increase

Another way to improve your credit utilization is by asking your credit card issuer to increase your credit limit. If you’ve been a loyal and reliable customer, the issuer may be more willing to approve your request.

If your credit limit increases and your spending stays the same, your credit utilization will go down, which is good news for your credit score. Just be careful not to spend more than usual.

Another option is to open a new credit card. While this might cause a small dip in your credit score at first, it can help in the long run by giving you more available credit.

Use multiple credit cards

If you’re making a big purchase, such as a new refrigerator, splitting it across multiple credit cards can help keep your credit utilization low.

For example, if you’re buying a $2,000 refrigerator and have two cards, each with $4,000 in total credit, you could charge $1,000 to each card. This would keep your utilization at 25 percent per card, instead of 50 percent on just one.

If you use this strategy, make sure to track payment dates and balances carefully to avoid missing any payments.

Cut back on expenses

If your credit card balances are slowly increasing and it’s causing some financial stress, it may be time to review your spending habits. Look for areas where you can save, such as canceling unused subscriptions or cutting back on dining out. Eliminating (or reducing) just a few expenses can help you save money and improve your credit utilization.

Keep credit card accounts open

Closing a credit card after paying off your credit card balance might be tempting, but doing this can hurt your credit utilization. Closing the card reduces your total available credit, which can cause your credit utilization to rise.

Instead, keep the card open but unused, storing it in a safe place to maintain your available credit without the temptation to spend.

Ways to improve your overall credit health

Boost your creditworthiness with these additional expert tips.

Use autopay

Since payment history is a significant factor in your credit score, paying on time every month is critical. Setting up autopay for the minimum payment due each month can help you avoid missing payments, as it automatically handles your payments for you. This can help you avoid late fees and penalties.

Limit new credit applications

Each time you apply for a credit card or loan, a hard inquiry is made, which can temporarily lower your credit score. To avoid negatively impacting your credit, try to apply for new credit only when necessary.

Review your credit report

Review your credit report at least once a year to ensure everything is up-to-date and accurate. Mistakes—such as accounts you don’t recognize—can hurt your score, so it’s important to fix any errors quickly. Obtain a free copy of your credit report at AnnualCreditReport.com. By federal law, you’re entitled to receive a free copy of your credit report once every 12 months from each of the three credit reporting companies (Experian, Equifax and TransUnion).

Pay more than the minimum

If you carry a balance on your credit card, try to pay more than the minimum due. This can help you pay off your debt faster, save on interest, and demonstrate to lenders that you’re managing your credit well.

Credit utilization is an important factor in your credit score, and improving it starts with small, manageable steps to better understand and control your available credit.