As mentioned in a previous post, 30% of your FICO credit score is based on your credit utilization rate. If you have a $2,000 balance on your credit cards and a total credit limit of $5,000, your credit utilization rate is 40%.
Some research done by Ben Luthi for Nerdwallet describes a 30% utilization ratio being preferred by lenders. To maintain that threshold, multiply your credit limit by .30 and try not to exceed that dollar amount.
One common mistake people make, including me when I paid down all my debts 15 years ago, is cancelling cards when paid off. While this is a psychological win, it hurts your credit utilization rate, thus credit score.
Of course, if you maintain a debt balance of $0, you can close all of your accounts. I do not recommend that though since credit cards can double as an emergency reserve if you are ever in a pickle.
Other than paying down debt, you can also decrease your credit utilization rate by asking your current card companies for a credit line increase or apply for new cards. While this may improve your credit utilization ratio, if hurts your credit score due to credit inquiries, which make up 10% of your score.
It’s best to pay as much as possible every month, but if you are getting ready to apply for a mortgage or car loan, you may want to try to play the “credit utilization game” outlined by Lindsay Konsko.
I would love to see comments from you. Especially how you overcame the burden of debt.