If you want to build a secure financial future, making the best choices with your money today will help you later. As a responsible borrower, you should know that your credit utilization rate refers to the amount of money available you’re using at one time. Use too much at once, and you could appear risky to creditors. If utilizing too much of your credit at once is a mistake you make, don’t worry. Here are five decisions you should make today instead of increasing the amount of credit you’re using.
1. Use a debit card or cash instead
The least comfortable but most effective way to cut down your utilization rate is to learn to use funds that you have in your checking account rather than the available credit you have on your credit card. Whether you’re purchasing equipment for home renovations or replacing the television in your living room, using a debit card instead of a credit card will help you avoid the risk of paying interest rates on your purchases should you fall behind in the future.
2. Apply for another credit card first
Another way to lower your credit utilization rate is to apply for another credit card before racking up a string of credit card purchases. Applying for and receiving another credit card will raise your available credit limit and lower your credit utilization rate. A higher amount of available credit and a lower utilization rate will help you increase your credit score, which ultimately increases your borrowing power. While the card might take a week or more to arrive in the mail, the temporary delay is helpful if the purchases you want to make can wait for another day. As long as you’re careful about not having too many cards, applying for one more will help you in the future.
3. Pay down your balance on your cards
If you can’t immediately apply for another credit card, keeping a low balance on your current cards will increase your credit score and make it easier to apply for additional cards. Instead of using more credit, analyze the costs of the purchases to determine whether they are mere wants or needs. If you can apply the excess funds to lower your current balance, you’ll be closer to eliminating high-interest debt and improving your credit score. Paying down your balance for several months is a healthy alternative to putting in an immediate application for another credit card.
4. Apply for a credit line increase
Do you consider yourself to be a responsible borrower? If so, you will likely pay your balances on time, avoid getting into too much debt, and maintain a healthy credit score for years at a time. Fortunately, that kind of credit profile is exactly what lenders are looking for when they decide to approve applications for credit line increases. You can increase your available credit limit by hundreds or thousands of dollars, immediately lowering your credit utilization rate while putting you in a better position to further improve your score. The decision ultimately comes down to choosing to wait for additional funds rather than use what little you have at once.
5. Build an emergency fund
Building an emergency fund means you’ll set money aside from your paycheck for emergency expenses. Additionally, slowing down on your purchases will help you save money, which you can also add to an emergency fund. Current research reported by major news publications indicates 56% of Americans can’t afford a $1,000 emergency expense. Not having money for emergencies can put you at risk for health problems in the near future. But from a financial perspective, having money saved provides you with the freedom needed to live life comfortably. For smaller credit card purchases, consider placing the money in an emergency fund instead.
Keeping your credit utilization rate low is one of the most important financial decisions you can make. This financial advice comes recommended by experts; David Geithner On Location Exp. Apply for another card or save money for later, choose to use what money you have now, and apply for a credit line increase. The smarter you are about using credit, the more you’ll have to use one day when you need it.