Your credit utilization ratio is an extremely important part of your credit score. This tells lenders—or anyone else looking at your credit score—what percentage of your total available credit line you’ve used at any given moment.
For instance, if you have a $100,000 line of credit, and you’ve spent $70,000 against it, your utilization ratio is 70%. That’s a high percentage, so that’s not a number that’s high-credit-score friendly.
Although different credit bureaus factor your credit utilization ratio into their score algorithm differently, the bottom line is that the ratio affects your credit score number. Ideally, you’d like to keep your ratio below 30%. If you need to lower your credit utilization in order to get a higher score to apply for business financing, for instance, there are some strategies you can take advantage of to get that number down.
We’ve written before on strategies for improving your credit, but in this article, we’ll focus on credit utilization in particular. Here are five ways to lower your credit utilization ratio.
1. Schedule credit payments more often.
Considering your credit utilization ratio is just that—a ratio—it’s up to you to bring that number down. If you are able, consider paying off your outstanding debts, such as business credit card bills, more than once a month.
If at all possible, you should already have your bills on autopay so you never miss a payment. For the months when your spending is higher than usual, nip that total in the bud so you’re not carrying such a high balance the entire month.
2. Transfer balances to 0% APR credit cards.
If you’re carrying a balance on your business credit cards, your interest means more money. That interest adds up, driving up your credit utilization ratio.
This actually harms you two ways. Not only does your balance end up costing you cash, but it also might end up costing you a higher credit score. In that case, consider applying for a 0% intro APR business credit card, many of which will allow you to transfer your balance. These cards have an interest-free introductory period, which means you can carry a balance on your card without paying anything extra for a predetermined period.
By transferring some or all of your balances to a new card, you can lower your overall average credit utilization across cards.
3. Keep your cards open.
Not using a credit card? Consider keeping it open anyway. It could actually help your credit utilization ratio.
The available credit line on all of the credit cards in your name comprises the total amount of credit you have to available to use. If you close a card, that total amount goes down. That means even if you don’t change your spending, your ratio goes up (which is the thing you will want to avoid).
Before you think about trying to reverse engineer this concept by applying for another card to increase your available credit, remember that any time you apply for any line of credit, your credit score gets a temporary ding because of the hard credit inquiry. This is also called a “hard pull” of your credit. Too many hard pulls can lower your credit score, and if you get rejected, this could also bring your score down.
4. Know when your lenders report to the credit bureaus.
Of course, you’ll have to make big purchases here and there. And it’s great that you have a credit card to do this! If you are spending a lot, having a sense of when your lenders report to the credit bureaus (generally once a month) will enable you to be strategic.
With this date, you can schedule payments before they report, or not make those big purchases right before your score is reported. Both of these can lower the ratio that your credit bureaus receive. You can simply ask your creditors to find out the date.
5. Get a better handle on your spending.
In general, the smartest thing you can do to lower your credit utilization ratio is to really have a sense of the details of your financial life. Knowing when your lenders report is one piece, but the other is simply understanding what your credit limit is and knowing how close you are to it with each purchase you make. The best thing about this piece of your credit score is that you have control over it. Part of getting down this number is staying in the loop with your spending and your payments.
As a business owner (and an individual, too) there’s a lot you can do with a higher credit score: Get a more favorable business loan, get approved for business credit cards that better benefit your business, get a mortgage, and have the leverage to negotiate on things like overdue payments. It’s important to do the work to improve your credit utilization ratio if you know it’s a place that you can do better. In most cases, it’s possible.