Credit utilization refers to the percentage of available credit you use at any given time. The more credit you tap into, the higher your credit utilization rate, resulting in a reduced credit score – much like a teeter-totter effect.
Simply put, your credit score is what lenders use to determine your level of creditworthiness and decide how much, if any, credit they can comfortably extend to you. Moreover, having a good credit score pays dividends by qualifying you for low-interest rates, saving you money. So, how do you achieve this? One way is to manage your utilization rate. Your utilization rate is the second largest determinant in your credit score after payment history. Payment history makes up 35% of your credit profile while credit utilization makes up 30%.
Credit card users who have credit scores over 795 have on average a utilization rate of 7%. Even though the lower the better, as long as you’re maintaining a utilization rate of 30% or less, you’re still within the general recommended range. If you’re struggling to reduce your credit utilization below 30%, it can impede your life in many ways. But the good news is there are many proven-to-work methods you can apply to hide your utilization from lenders, helping make qualifying for low APRs and large loans easier.
Continue reading below to discover our recommended tips and tricks.
1. Increase Your Credit Limit
Recall above; we touched briefly on how your credit utilization rate increases in tandem with increasing credit card balances. Let’s break this down to show you why it matters and how you can maneuver around it by increasing your overall credit limit.
Example: The cardholder has two high-balance credit cards:
Credit Card 1: Has a $5,000 credit limit with a current balance owing of $2,500
Credit Card 1 Utilization = $5,000/$2,500 = 50%
Credit Card 2: Has a $2,000 credit limit with a current balance owing of $2,000
Credit Card 2 Utilization = $2,000/$2,000 = 100%
Credit Card 1 + Credit Card 2 Total Utilization = $4,500 / $7,000 = 64%
As is displayed in our example, the cardholder currently uses 64% of their total available credit. According to FICO, lenders like to see a 30% or less utilization rate to deem the applicant creditworthy. Anything above is where you start to run into danger with your credit applications, such as being declined or getting approved with extremely high APRs.
So, how do you reduce the rate if you can’t pay down the balance? Add more credit! While this may seem counterintuitive, the added credit will reduce your utilization rate because it will give the illusion that you carry a low balance.
Here are two very feasible ways you can accomplish this.
Apply for an Additional Credit Card
The best way to do this is to apply with your bank or a lender with whom you have an established credit history. If you have a high utilization score and apply to a new institution, you have a high chance of being declined.
Taking from the example above: Suppose the cardholder gets approved for a personal line of credit amounting to $5,000. This will increase their total available credit to $12,000, reducing their utilization from 64% to 37.5%.
If you use this strategy, one caveat to keep in mind is that with every credit application you put through, your overall credit score will be reduced by a few points, usually to the tune of 10 points lower for about a year. However, you can apply to as many as you want within a one-month timeframe, and they’ll all get counted as a single hard pull.
Therefore, we recommend planning out your applications and doing them all at once. If you have a preapproval lying around your house, filling out that application could prove fruitful as well.
Apply for a Credit Limit Increase
With this strategy, you will apply for a credit increase on one or more of your credit accounts, rather than applying to open a new one. This may be the easier of the two options because you have an established account history with the lender. If you have a history of making payments on time and earning the same or more income as you did when you initially applied, you have a good chance of getting approved.
Applying is quick and straightforward. All you need to do is log in to your online credit card account and apply through their application portal. Alternatively, you can call customer support and apply over the phone to avoid any data entry errors that could prolong your application. You might be lucky if they approve you on the spot.
Both these examples offer you a quick solution to hiding your true utilization rate, so whichever one you think works best for you, go ahead, and give it a try.
2. Keep Your Credit Accounts Open
If you have unused credit accounts sitting idle that you no longer use, keep them open. There are two reasons we suggest doing this:
Decreases your debt-to-utilization ratio
While you may deem your unused credit cards useless, just by having that available credit, you will notice a decrease in your utilization rate and an increase in your credit score. Keep in mind, however, depending on your lender’s credit model, they may close your account if it sits idle for too long. As such, we recommend using it for small purchases periodically, such as for your monthly TV subscription or gym membership.
Maintains your credit history
When you close a credit card account you’ve had for a long time, your credit history start date could be shifted to the date a newer account was opened. While this won’t impact your utilization score in any way, it’s something to be mindful of as lenders look at how long you’ve been using credit as a marker in ranking your creditworthiness.
3. Pay off Cards with a High Utilization Rate First
If you’re struggling to pay off your entire consumer debt balance, we recommend paying off cards with the higher utilization rate first. The key here is to do your best to keep individual cards at a relatively low balance, even if your overall balance is high. This strategic way of managing your credit balances works in hiding your overall utilization score.
From the example above, we would recommend chipping away at Credit Card 2, which has a 100% utilization rate, while maintaining the minimum payments of Credit Card 1. Over time, the individual and overall utilization rates will fall, improving the overall credit score.
For more tips on how to improve your credit score, check out our DIY credit repair guide.
4. The 15/3 Credit Card Hack
Most strategies to build credit usually pay off over a period of time. Here we’ll be talking about the 15/3 credit card hack, which is a method that can increase your credit score relatively quickly if done right.
The 15/3 credit card hack is a strategy in which you pay part of your credit card 15 days before your statement date and then another payment 3 days before your statement date. The idea is that banks usually report to the three major credit bureaus on your statement date, so you’ll want to close out your balance as much as possible by that time. The 3 days gives you a buffer for any payment to go through on time.
Contrary to somewhat popular belief, the biggest help is not the fact that you’re paying off your balance multiple times during the billing cycle, but rather the fact that you’re getting your credit utilization rate as close to 0% as possible right before the bank reports your utilization rate to the major credit bureaus. Paying your balance multiple times throughout your billing cycle doesn’t make one iota of a difference.
Here’s the trick in action:
- Your billing cycle is from September 1st through October 1st, and you’ve got a credit limit of $5,000.
- September 15th comes around and you’ve got a balance of $3,000. That’s a 60% utilization rate (no good).
- You pay off $2,000 of it and now your utilization rate is $1,000 / $5,000 which is 20% (much better!).
- September 28th comes around and you’ve spent an extra $1,000 since, bringing your balance to $2,000. Your credit utilization rate is now $2,000 / $5,000 which is 40% (no good).
- You pay off $2,000 again bringing your balance to $0 (fantastic!).
- Then you rack up $200 in spending when you reach October 1st. Your credit utilization is $200 / $5,000 which is 4% (not bad at all!), and this gets reported to the three major credit bureaus.
You’re now ready to apply for that loan you’ve been eyeing!
While there is no easy solution to lowering a high utilization rate if you don’t have quick access to cash to pay down your balance, with a bit of strategy and discipline, you can make the numbers work in your favor. The ultimate goal here is to improve your credit or FICO scores to put you in better standing with lenders for significant loans such as a home mortgage. If you have an extensive loan application on the horizon and need to secure a low-interest rate, we recommend applying our methods. Alternatively, if you’re applying for a job in the financial sector that requires you to pass a credit check, our tips can help you pass with flying colors.