5 ways to reduce credit card use
Credit card debt can be a costly burden to bear. Take into account average annual percentage rate – the interest rate, plus any charges – credit cards in the US News database, which ranges from about 15% to 23%.
But credit card debt can cause serious problems beyond wasted money on interest charges. If your cards have high credit usage rates, it could hurt your credit score even if you make all of your payments on time.
What Is Using Credit And Why Is It Important?
Your credit utilization rate takes two digits, your credit limit and your current balance, to calculate the percentage of your credit limit amount that you are using.
For example, if you have a credit card account with a limit of $ 10,000 and a balance of $ 5,000 on the card, your credit utilization rate is 50%.
The lower your credit usage, the more attractive you are to lenders. “Low credit usage shows lenders that you are responsible for your credit,” says Leslie Tayne, debt settlement lawyer and founder and CEO of Tayne Law Group. “High credit usage can hurt your credit score. “
Credit scoring models such as FICO and VantageScore analyze your debt-to-limit ratio when calculating your credit score. With FICO scoring models, credit usage represents 30% of your credit score. So when you reduce the use of your credit card, your credit score may increase.
What is a good credit card usage rate?
If you want to achieve and maintain good credit scores, it helps to know which scoring models consider good credit card usage rates. The answer to the question, however, depends on the credit scoring model used and your goals.
Experts at VantageScore often advise maintaining a credit utilization rate of 30% or less. However, a debt-to-limit ratio as close to 0% as possible is preferable.
Fair Isaac Corp., the creator of the FICO score, also recommends keeping credit card usage rates low – the lower the better. Are you aiming for an excellent FICO score? According to the company, consumers with a score between 800 and 850 have an average renewable usage rate of 4 to 5%.
Chad Kusner, president of the credit repair company Credit Repair Resources, gives a good rule of thumb to follow. You want to show that you are using your credit cards, “but also keep the balance as low as possible,” he says.
How can I reduce the use of my credit card?
There are several ways to reduce your credit card usage rate.
1. Pay off your credit card balance. The easiest way to reduce your usage rate is to pay off your balances. It’s easier said than done.
The good news about paying off your credit cards is that you don’t have to hit 0% usage before your credit score has a chance to improve. As you pay off your debt and reduce your credit card usage in increments, your score may start to increase over time.
2. Learn the closing date of your statement. Another tip for reducing your credit card usage is to know the closing date of your account statement and to pay your balance before that date. “The balance we owe on the statement date is what is reported to the credit bureaus,” says Kusner.
You could charge $ 5,000 to your credit card account throughout the month. But if you repay this balance before statement closing date, your credit report will show a zero balance. This is a 0% credit utilization rate.
3. Do not add to credit card balances. “Avoid spending more than you can afford at the end of the month” if you’re trying to cut back on your credit card use, Tayne says.
Worried about temptation? Consider putting your credit card in a safe place instead of carrying it in your wallet. You can also implement a 24 hour rule, taking 24 hours to think about unexpected purchases.
Just be careful not to close credit card accounts in an attempt to reduce your spending habits. Closing a credit card will increase your overall credit usage rate and could adversely affect your credit score.
4. Ask for an increase in the credit limit. Increasing the spread between your credit card balance and your limit decreases your usage rate. In addition to paying off your balance, the other way to get some distance between those two numbers is to increase your credit limit.
Let’s say you have a credit card with a limit of $ 10,000 and a balance of $ 5,000. Your credit utilization rate is 50%. If you increase your limit to $ 15,000, your usage rate will drop to 33%, even if the balance remains the same.
Asking your credit card company for a limit increase can help keep your usage rate within reason, says Tayne. A higher limit can prevent a blow to your credit score if you have to make a large purchase that you cannot pay immediately. But Tayne cautions consumers not to go overboard with their spending, even if a higher credit limit request is approved.
5. Become an authorized user. A ready-made way to reduce your overall credit card usage requires a favor. If a friend or family member adds you on the correct credit card like Authorized user, your credit score could benefit.
“You could ask someone to add you as an authorized user on a credit card account that has a low balance, high limit, and a great payment history,” Kusner explains. “Now your overall or overall usage will be lower.”
Of course, Kusner maintains that paying your credit cards on time is an essential part of achieving a good credit score. It also encourages consumers to use credit cards responsibly and not charge more than they can afford.
How will the decline in credit usage affect my score?
In credit scoring, specific stocks do not have exact point values. Reducing your credit utilization rate by 10% will not increase your credit score by 10 points (or any other guaranteed number, for that matter). This is not the way credit scoring works.
Everyone’s credit, says Kusner, has a unique DNA. The same action, such as paying a credit card, can influence individual credit scores differently. It depends on your profile how much the drop in the rate of use of your credit card has on your credit score.
If your usage rate is already below 30%, you might not see much improvement paying off a credit card. But if you’ve stayed near your credit limit, you should see a bigger positive change in improving your use of credit.
You should expect at least some benefit from reducing your use of credit, although there is no guarantee of how much you can improve your credit score. Remember, this factor is second after payment history when it comes to calculating scores, so improving your credit utilization rate can make a big difference.