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Making on-time payments is the number-one factor in maintaining a good credit score. But after that, lenders look closely at your credit utilization — or how much you're spending in comparison to the total of all your credit card limits.
Your credit utilization rate (or amounts owed) makes up 30% of your FICO credit score and is the second-most important factor after payment history. Experts generally recommend keeping your utilization rate below 30%, with some suggesting that a single-digit utilization rate (under 10%) is best.
"Really, being in the single digits is better," says Jim Droske, president of credit counseling company Illinois Credit Services (and someone with a perfect credit score). "It's the best place to be because, mathematically, it's an algorithm; you want to be at the lowest number, but anything greater than zero."
While it's not necessarily exact science, spending more than 10% to 30% of your credit signals to lenders that you might be at risk of going over your limit and may not be able to pay the balance back.
On an average day, you probably don't think much about this percentage, especially if you know you always stay under your limit. But if you want to earn the best credit score possible, take a closer look at your CUR.
To calculate your CUR, divide your total outstanding balances across all your cards by your total credit limit. Then, multiply by 100 to get the percentage.
For example, if you carried the average credit card balance of $6,194 on your card(s) and also had the average credit card limit of $22,751, you would divide the first by the second and multiply by 100. This would give you a CUR of about 27%.
Whether you have a utilization rate near the average 27% or not yet below 10%, there are always small moves you can make to lower yours and see a boost in your score.
Here are CNBC Select's three tips for lowering your CUR:
- Pay off your balances more than once a month.
- Request a higher credit limit.
- Avoid closing credit cards.
Instead of waiting for the due date to pay off your credit card balances, consider making periodic bill payments throughout your billing cycle.
Card issuers report your statement balance to the credit bureaus roughly once per billing cycle to the credit bureaus — Equifax, Experian and TransUnion. The bureaus then use your reported balance to calculate your CUR.
It's hard to know when exactly your card issuer(s) is going to report your balance, but if you pay down your card regularly, the bureaus are more likely to see a smaller amount. Some people pay off their cards as soon as they use them, but you could also make bimonthly or weekly payments if that's easier.
You also may want to call your card issuer to ask when they report to the credit bureaus, especially if you are trying to manage multiple credit cards. Not every card issuer followers the same reporting schedule.
Another method is to sign up to receive text or email balance alerts from your credit card issuer. Consider using credit cards with user-friendly apps that let you manage your payments from anywhere.
For instance, cardholders of the American Express® Green Card or American Express® Gold Card can use the Amex mobile app Pay It, Plan It feature to pay off small purchases as soon as they post to their account. This way, cardholders can ensure that their balances stay low.
And Citibank customers who carry a card such as the Citi Rewards+® Card can opt in to use the Citi Mobile® Snapshot feature on the app so that they can view their available credit amount and credit card balances without the hassle of having to log into their accounts.
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Having low balances and high credit limits is the recipe for low utilization. Consider calling your card issuer to ask for a credit limit increase if you find that you're regularly spending more than 30% of your total limits.
Increasing the total amount of available credit makes it easier to stay below the 30% threshold, giving you a little more breathing room to make your monthly expenditures. Just make sure that you feel confident in your ability to stick to your budget; a higher threshold provides additional opportunity to spend beyond your means.
Before you call, pay down at least some of your outstanding credit card balances to show you are financially responsible. (It's not exactly necessary, but it will help with your case.) Your approval is not guaranteed, but you're in the best position to get approved if these two factors are true:
- You have at least a good credit score (661 to 780).
- Your income has increased since you applied for the credit card.
Of course, checking off the above items is not a guarantee, but having a good score and income does increase your chances of getting additional credit.
If you just opened a new credit card, you may have to wait at least three months before requesting a credit limit increase. Some cards issuers, like Citi, require that you wait six months between credit limit increase requests. So, if you have a card like the Citi® Double Cash Card, you can technically only request a higher limit twice per year.
Before you ask for a higher credit limit, know that doing so could result in a hard inquiry if your card issuer pulls your credit report in the approval process. Hard inquires temporarily ding your credit score.
Think twice before you close out any of your credit card accounts — especially your oldest one.
When you get rid of your credit card, you also take away that specific credit limit from your overall available credit. This often results in your utilization percentage going up and, thus, an immediate negative impact on your credit score.
While your score will likely decrease initially after closing a credit card, continue to make your bill payments on time on your other credit cards and your score will rebound within a few months.
Before closing an account, check to see how your credit score would be affected by using an online score simulator, such as CreditWise® from Capital One. With this free service, you can see how taking certain actions, such as closing a credit card or paying off a balance, might impact your credit score.
Credit bureaus monitored
TransUnion and Experian
Credit scoring model used
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See our methodology, terms apply.
Learn more: Here’s why I haven’t closed my first credit card
Information about the American Express® Green Card has been collected independently by CNBC and has not been reviewed or provided by the issuer prior to publication.
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