Most people who have credit cards know that getting into debt is a slippery slope. According to a recent study by the Federal Reserve Bank of New York, 1 in 5 Americans are maxed out on their credit cards due to rising prices and higher interest rates. Credit card delinquencies are rising and many people are spending 90% of their credit utilization.
While it can be challenging to get out of credit card debt, it’s not impossible. Here are some tips and advice to understand your credit utilization ratio and pay down credit card debt even if money is tight.
Understanding Credit Utilization Ratio
If you’ve been using credit cards as a financial tool, you’re probably aware of the term “credit utilization ratio.” But do you know the significant impact it has on your credit scores and overall financial health?
Credit utilization ratio is the percentage of your available credit that you’re currently using. It’s an important factor in determining your credit score and plays a crucial role in lenders’ decision-making process.
How Is Credit Utilization Ratio Calculated?
Your credit utilization ratio is calculated by dividing your total credit card balances by your total credit limit. For example, if you have a credit limit of $10,000 and your current balance is $3,000, your credit utilization ratio would be 30%.
Financial experts recommend keeping your credit utilization ratio below 30% to maintain a good credit score. Lower utilization rates are perceived as less risky by creditors, indicating that you’re using credit responsibly without relying too heavily on it.
Effects of High Credit Utilization Ratio
A high credit utilization ratio can significantly impact your credit scores. Credit scoring models view high utilization as a signal of potential financial distress, possibly leading to lower scores. The impact varies among different credit score ranges, but universally, lower utilization ratios contribute to higher credit scores.
Steps to Lower Your Credit Utilization Ratio
Reducing your credit utilization ratio can be approached in several ways, both short-term and long-term.
Try to Limit the Use of Credit Cards
I know this sounds hard to do, but you will need to stop using credit cards temporarily if you want to get out of credit card debt and lower your utilization ratio. You can’t get rid of your credit card balance if you continue to spend as you normally do. They key is to find a way to rely less and less on credit cards and instead use cash or your debit card.
Run the Numbers For Your Budget
In order to successfully complete the first step, you need to run the numbers and adjust your budget. Add up all your necessary expenses and some of the wants and flexible spending that you’d like to keep. Then, subtract everything from your take-home pay. If there is money left over, you have room to pay extra toward your credit cards.
If not, you will need to make adjustments and lower your spending. Get creative and find ways to sacrifice and cut out unnecessary spending. Give yourself a timeline so you’re not making huge cuts long-term. Maybe you can go 6 months to a year without traveling in order to pay down credit cards or you can skip some of your subscriptions for a while to reduce spending as well. List out what you’re willing to do and then get to work.
Get a Flexible Side Job/Side Hustle
So many people are getting extra jobs or working additional hours to make ends meet and pay off debt. Picking up work may not be fun, but it’s another temporary thing you can do to lower your high credit utilization ratio.
I’d recommend leaning toward a side hustle that is flexible and pays competitively. Consider freelancing, or offering hands-on services like dog walking, baby sitting and cleaning homes or offices. You can also offer creative services such as editing videos or podcasts. Freelancing is nice because you can usually set your own rates and schedule so long as you meet deadlines. This gives you the freedom to make money at 6 am before heading to your 9 to 5 or Sunday afternoon when you have free time.
If you can’t work a side hustle right now, consider picking up extra hours at work if it’s not too stressful. Getting a part-time job is another option if it would leave you feeling mentally and physically drained. Some warehouse jobs like Amazon offer flexible and short shifts along with competitive sign on bonuses for workers.
Summary
High credit card debt does not have to be forever. Understanding and managing your credit utilization ratio is a key component of financial wellness. By taking steps to lower your ratio and monitoring it regularly, you can improve your credit score, making it easier to qualify for loans with favorable terms. Take action today and start on the path to a healthier financial future.
Remember, managing credit wisely is a marathon, not a sprint. If you have questions or need feedback on managing your credit utilization ratio, feel free to reach out or share this post with someone who could benefit from it.
Learn more about paying down debt and managing your money for success by downloading the free guide.
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