Credit score

Do you care about your credit score? Be strategic with card limits

If you have credit cards in your wallet, you can track your balances to control your budget, but knowing each card’s credit limit by heart is another story. However, actively managing how much of your credit limits you use — also known as your credit utilization ratio — can have a big impact on your credit score.

Your credit score is a mix of many factors, including your use of credit. If you want to increase your credit score, focusing on using your credit limits less is an effective way to do it. People with excellent credit tend to have low credit utilization ratios.

According to credit expert John Ulzheimer, use is one of the most practical ways to improve your credit: “To the extent that you have the ability to pay off your credit card debt, your ratios will go down. It’s just a fact.

Even if you can’t reduce your balances, a few other strategies can help you reduce credit usage.

What is a credit limit and who determines it?

Your Credit limit is the maximum amount you have been allowed to spend by a creditor, based on factors such as your payment history, income, and credit score. A credit limit is not set in stone and is subject to change over the life of the account: your card issuer may increase or decrease your limit without notice, and you may also request a credit limit increase (more on this later).

How you use your credit limits can improve your score

Make sure you know your credit limits. Try checking your latest bill or banking app to find the limit for each card. With your limits in mind, you can focus on keeping your balances low.

Ideally, you don’t want to use more than 30% of the credit limit on any card. The lower this credit utilization rate, the less risky you seem as a potential borrower. People with the highest scores tend to use less than 10% of their limits. You can calculate your credit utilization rate by dividing your balance by your credit limit. Multiply this number by 100 to get a percentage. Or you can use a credit usage calculator.

Keeping tabs on your credit usage is as easy as setting an alert once you hit a certain spending threshold. Most cards allow you to do this. Many personal finance websites and apps also have a dashboard that shows your usage.

Other strategies can help you keep credit utilization low. “Pay an amount before you receive your statement,” says Chi Chi Wu, an attorney at the National Consumer Law Center. “Because usage is calculated from the balance at the end of the billing cycle, if you prepay it, you now reduce that usage.”

Ulzheimer suggests two other ways to reduce your consumption: Start by trying to reduce your credit card balance if you’re in debt from month to month. Or you can request an increase in your credit limit, which not only gives you more flexibility to make larger purchases, but also helps lower your credit utilization rate.

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“If you can do both at the same time — lower balances and more credit limits — then again, you’ve lowered your ratio,” Ulzheimer says.

It only works if you can keep your balance low and resist any temptation to increase your spending. Also note that requesting a higher limit may temporarily affect your credit score.

The COVID Connection

For a concrete example of how credit use and credit score are linked, look no further than the COVID-19 pandemic. Recent data from credit rating firm FICO shows that in 2020, many Americans took advantage of government spending cuts and stimulus checks to pay down consumer debt. According to FICO, average credit card balances decreased by 10.9% and the average FICO score increased by 8 points between April 2020 and April 2021.

Doing something simple, like using extra money to pay off existing credit card balances or making multiple payments throughout the billing cycle, can improve your credit, even during tough financial times.