Credit Score Lower Than You Expected? This Sneaky Factor Might Be Why

Credit scores are complicated beasts. The three major credit bureaus use different formulas for calculating their scores, but they all generally consider the same key credit factors like payment history, credit mix, and age of your credit accounts.

One significant component of your credit score that doesn’t always get as much attention as the rest is your credit utilization ratio, or the amount of available credit that you are currently using. Unlike most of the other factors, your credit ratio can change from week to week, or even day to day, and it can account for up to 30% of your credit score.

Learn how credit ratio impacts your credit score and how you can optimize it to raise your credit score or keep it high.

For more, see how debt consolidation and student loan forgiveness could affect your credit score.

What is my credit utilization ratio?

Put simply, your credit utilization ratio is the percentage of your available credit that you are using. For a basic example, if you have one credit card with a $1,000 limit, and your current balance is $200, your credit ratio is $200 / $1,000, or 20%.

VantageScore will consider only revolving credit, or credit card accounts, in the calculation of your credit utilization ratio. FICO will consider your credit ratio as part of its “Amounts Owed” category, which is how much debt you have in total.

It’s important to remember that VantageScore and FICO monitor your total credit utilization (using balances and credit limits for all your credit cards) as well as the ratios for each of your individual accounts. If your overall ratio is moderately low, but you have one card maxed out, that could bring your credit score down.

Perhaps more important is that credit bureaus don’t calculate your credit utilization ratio using your current credit card balances. They calculate it using the account balances that your credit card issuers report to the credit bureaus. Each issuer has its own system, but the reported numbers are often the balances from your monthly statements.

Even if you’re paying off your credit card balances every month, if you have a high credit ratio at any time during your billing cycle, it could hurt your credit score.

What’s a good credit utilization ratio?

“It’s commonly recommended that your credit card balances are kept at or below 30% of your assigned credit limit,” Bruce McClary, senior vice president of the National Foundation for Credit Counseling, told CNET.

While 30% or less credit ratio is the general guideline, those who want excellent credit scores will need to keep it even lower. According to credit rating company Experian, “If you’re focused on having excellent credit scores, a credit utilization ratio in the single digits is best.”

“The truth is, the lower your balances the better. The more you carry, the more it might lower your score,” Todd Christensen, education manager at Money Fit, told CNET.

But you shouldn’t aim for a credit ratio at 0%. Experian also says, “the only way to be sure you have 0% utilization all the time is to refrain from using your credit cards at all,” which could result in an issuer closing your account, reducing your available credit and increasing your ratio.

How can I lower my credit utilization ratio?

Since credit ratio is an expression of money borrowed divided by credit limit, the main ways to decrease that ratio are to lower your debt and increase your credit limit. Here are the best ways to accomplish that.

First, pay down your debt as much as you can

The easiest answer for lowering your credit ratio — pay down your debt — may also be the most difficult to accomplish. If you can reduce your debt, however, you’ll get a double payoff — along with lowering your credit ratio, you’ll also be saving money in finance charges, which is the interest you pay on your credit card debt.

Next, ask for a higher credit card limit

Increasing your credit limit will help reduce your credit ratio because the amount you owe is now a smaller percentage of the maximum you can borrow. It’s easy to request a credit card limit increase — just call the phone number on the back of your card and talk to a representative. 

Before you ask for a higher limit, however, keep a few things in mind. This strategy only works if you don’t increase your balance owed. If a higher limit is going to tempt you to spend more, you might wan to reconsider.

Also, ask your credit card representative if the company will run a hard credit check before approving your request. Although a higher limit will help your ratio, a hard inquiry could ding your credit score 5 to 10 points for a year or so.

Set up credit card balance alerts

Most credit cards now let you create notifications online for your account, including the amount of your balance. These can be emails, text messages or alerts through your credit card’s website.

To protect your credit ratio, set up an alert that notifies you whenever your balance reaches 25% of your credit limit. That balance level will give you some padding to make sure that you stay below the recommended 30% ratio.

Keep old credit cards and use them a little

If you have older credit cards that you don’t use much or at all, don’t cancel them. You’ll only reduce your overall credit availability and hurt your credit ratio, as well as your average age of credit.

However, if you don’t use a credit card at all, the issuer may cancel it for lack of activity. Instead, use old cards sparingly, such as a purchase every few months, in order to keep your accounts open and your total available credit high.

Once you know the principles behind credit utilization ratio you can use these tactics to decrease your ratio and bolster your credit score.

For more on best practices for good credit scores, learn how to build credit quickly and how to get a free weekly credit report through the end of the year.

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