What is a credit utilization rate, and how does it affect my credit score? The 4 steps you can take to improve your credit score today and pay off credit card debt

My credit score was terrible seven years ago, and I had over $10,000 in credit card debt. I signed up for a credit card when I was 17 and had no idea what credit meant and destroyed my score in the process. 

I remember walking through the green space as an excited freshman undergraduate student during the welcome week. All the club and student associations were set up with booths, and pamphlets, actively trying to get new students to sign up for activities. I remember walking past one, offering a free volleyball in exchange for a credit card. I like to take this moment to indulge in why this is a ridiculous reason for me to sign up for a credit card. I’m the most uncoordinated person when it comes to hand to eye contact sports. You name it; I’m terrible at it-volleyball, tennis, basketball, it’s a long list. 

So why would I sign up for a credit card, without reading the terms, for a “free” ball? Because I was a teenager that didn’t understand that what I would charge would not be what I eventually have to pay back.

At the beginning of having my credit card, I will say that I did use it reasonably responsibly. I mostly charged items such as last-minute books for college that my scholarship and loans didn’t cover. But just like most good intentions without a solid plan, I started to slip into buying things that I deemed as “needs” that were impulse buys. And a few years into paying only the minimum amount left me in over $10,000 in credit card debt.

If you are finding yourself in this position, first take a deep breath. And next, make a debt payoff plan that is realistic to your current finances and with specific timing. For me, it involved creating a budget, cutting down on my expenses, and paying off my debt in about 14 months. See below for the 4 tactical steps I took to my credit card free journey.

1.Know how much you own and what is listed on your credit report

Whew, I use to avoid knowing my credit score like a clip out of the movie Mean Girls when you try to avoid a “frenemy.” I thought if I didn’t know the numbers, then it was one less thing I needed to worry about when it came to my finances. But the reality is that knowledge is power, and not knowing left me vulnerable to accept whatever terms from creditors. Knowing my credit score and what is listed on my credit report allowed me to make a plan that fits my finances. It's like if you went to meet with a personal trainer, and they didn’t know your health history, and you refused to be weighed and measured. How will this person help you if they don’t know your current status and where you’ve been? This is all to say that you should request a free annual credit report once a year and dispute any mistakes or fraudulent activity. As well as sign up for a credit reporting service and check your numbers regularly.

2. Pay down your revolving balance by making an extra monthly payment

If I could jump in my time machine and smack my forehead, I would tell the younger version of myself to pay more than the minimum on my credit card. And also to stop charging more than my penniless pockets could afford. At the time, my credit card minimum was $35, and at that time, I thought as long as I paid on time, I would be fine. But at that rate, I would be spending on my balance for close to 10 years. Even for the most necessary charges, like books, I would be paying on them years past graduation. 

One of the critical ways I could climb out of credit card debt was by having a realistic budget that fit my personal finance goals, which involved adding additional payments on my credit card debt. I emphasized the realistic point because a budget should reflect on how you value and spend money, which is unique for each individual. For me, I place a high value on cooking and love to try new restaurants. So I knew when I created my budget, it needed to account for the fact that I naturally tend to spend more in that area. Other places of discrepancy spending like clothes and entertainment, were areas I could easily cut out. I started by adding small amounts of extra payments, like $50; I increased that amount, which cut down my debt payoff timeframe.

3.Consider a balance transfer to a zero APR credit card

As I continued to pay down my credit card balance, my credit utilization score decreased, and my credit score improved. These changes in my scores allowed me to qualify for a credit card with better terms and a promotional offer. One of the critical moves to paying off my credit card was completing a balance transfer. This involved me paying a small balance transfer fee for the new credit card, which I believe at the time it was 4% of my total credit card balance. 

However, the cost savings on interest charges with my initial credit card was worth it in the long run. Also, not adding any new purchases during the promotion period allowed me to pay off my credit card debt on time. I would purposely leave the new credit card at home and never added any recurring subscriptions or that card number to online services. I treated this card as part of my debt payoff plan and not as a new credit line.

4.Ask for a credit line increase but don’t spend to the new limit

If you have an existing credit card and have been a customer in good standing, meaning you haven’t missed a payment in the last six months, you should ask for a credit line increase. I try to plan and do this with each of my credit cards at least once a year. The key is to make sure when you get the credit line increase, not increase your monthly spending. It’s essential to ask for a credit line increase since it is directly tied to your credit utilization score. 

A credit utilization score is the amount of money you owe across all your credit lines, divided by the total amount of credit that is accessible to you. For example, if you charged $500 and your credit limit is $1,000, your rate would be 50%. If I’ve been making on-time payments with my credit card and haven’t recently asked for a credit line increase, I could call my credit card company or, in some cases, request a credit line increase online. If they increase your credit line to say $3,000, your new credit utilization rate would be 16% (i.e., the initial $500 you owe divided the recent credit line increase of $3,000). 

You may be thinking, why is this important? It’s critical since credit utilization has one of the higher impacts on your credit score. Most personal finance experts advise consumers to try and stay under 30% for a credit card utilization rate. I try to stay under 10% and ask for a credit card line increase as part of my overall credit strategy at least once a year.

What are some of the steps you are taking to either get out of credit card debt or not get in debt as we approach the holiday season?

Let me know in the comments or send me a Instragram DM over @leapstepjump.

-Ashley