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It's important to understand that your credit utilization ratio is the amount of credit you have available that you're using at the specific time your credit score is calculated.
If you're paying off your credit card balance each month thinking that this will protect your credit score, you could be in for an unpleasant surprise.
The reason why this is true is because the credit card companies only report your balances to the credit bureaus once a month and that's shortly after your account’s closing date.
If you use up a big portion of your credit limit one month – like charging up $2000 in Christmas purchases – on a card that has a limit of just $3000 – and you pay off that balance in full before your due date but after your statement's closing date, the credit reporting bureaus will still see your balance as $2000 with an ugly credit utilization ratio of 67%. This is despite the fact you are current. And worse yet, this will stay in your credit reports until the next month
when there is a new closing statement generated.
How to avoid this
Fortunately, it's relatively easy to avoid this problem. All you need to do is pay a small portion of your credit card balances several times per month. This will prevent you from building up a high balance.
Of course, the best strategy still is to pay off your credit card balance prior to your statement closing date. This will guarantee your credit utilization percentage will be zero, which will be great for your credit score.
How to improve your credit utilization ratio almost immediately
Could you pay down some of your credit card balances while eliminating others entirely? If you can do this, you should see your credit score begin to improve almost immediately.
The first ones you should pay off are those of your accounts with low balances. These are sometimes called "nuisance" balances. Paying them off should also improve your credit score almost immediately.
The next thing you will have to do is tackle those credit card debts with the high balances. This will take some time. The good news is that even though it will take time to pay down those balances, your credit utilization ratio will go down while you're doing it. A credit utilization of 50% is still better than 60% and 30% is better than 50%. It just boils down to the lower the better.
If you're stuck
If there is a good reason why you can't pay down some of your credit card debts very quickly, there is an alternative.
You could get some new credit.
Getting back to our example of having charged $2000 on a $4000 credit card, which yields a credit utilization ratio of 50%, you might be able to get a loan for $2000. You would then immediately have a credit utilization ratio of 33%, which would look much better to potential lenders. Of course, you would not want to use that money to pay for anything because that could just cause your credit utilization ratio to go back up.
Here's a short video that explains more about the relationship between credit utilization and your credit score and includes an example of why it's best to pay off one of three credit cards first.