With card limits, be strategic to increase your balance


    Having credit cards in your wallet can keep your balance tracked to keep your budget in check, but knowing each card’s credit limit out of your head is a different story. However, actively managing the credit limit you use – also known as your credit utilization rate – can have a huge impact on your creditworthiness.

    Your credit score is a mix of many factors, including your credit usage. If you are looking to improve your credit score, focusing on using less of your credit limits is a powerful way to do this. People with excellent credit ratings tend to have low credit utilization rates.

    According to loan expert John Ulzheimer, one of the more viable ways to improve your credit score is to draw it: “As you can pay off your credit card debt, your odds will go down. That’s just a fact. “

    Even if you can’t reduce your credit, there are some other strategies that can help reduce your loan utilization.

    What is a credit limit and who sets it?

    Her Credit limit is the maximum amount approved by a creditor based on factors such as your payment history, income, and creditworthiness. A credit limit is not set in stone and is likely to change over the life of the account: your card issuer can increase or decrease your limit without warning, and so can you ask for an increase in the credit limit (more on that later).

    The way you use your credit limits can help your score

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

    Ideally, you don’t want to use more than 30% of the credit limit on a card. The lower this loan utilization rate, the less risky you appear 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 that number by 100 to get a percentage. Or you can use an online Loan Utilization Calculator.

    Keeping an eye on your credit usage is as easy as setting up a notification when you’ve reached a certain spending limit. Most cards can 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 get your statement,” said Chi Chi Wu, an attorney at the National Consumer Law Center. “Since the utilization is calculated from the balance at the end of the billing cycle, you reduce this utilization now if you pay it in advance.”

    Ulzheimer suggests two more ways to keep your usage down: First, if you have month-to-month debt, try reducing your credit card balance. Or you can increase your credit limit, which not only gives you more flexibility for larger purchases, but also helps to lower your credit utilization.

    “If you can do both at the same time – lower credit and more credit limits – then you have lowered your quota,” says Ulzheimer.

    This only works if you can keep your bankroll down and resist any temptation to increase your spending. Also, be aware that applying for a higher limit may temporarily affect your creditworthiness.

    The COVID connection

    For a real-world example of how credit utilization and creditworthiness are related, check out the COVID-19 pandemic. Recent data from credit rating firm FICO shows that in 2020, many Americans took advantage of reduced spending and state economic controls to help pay off their consumer debt. According to FICO, the average credit card balances decreased 10.9% and the average FICO score increased 8 points between April 2020 and April 2021.

    If you do something simple – like using extra cash to pay off credit card balances, or making multiple payments during the billing cycle – you can improve your credit score, even during troubled financial times.

    This article was written by NerdWallet and originally published by The Associated Press.


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