How to Spread Debt and Spending Across Multiple Cards to Decrease Credit Utilization Ratio

Do One Thing: When working on building or maintaining a solid credit score, it helps to know where you stand. You can request a free copy of your credit report each week, from each of the three major consumer reporting companies – Equifax, Experian, and TransUnion. Call 1-877-322-8228 or visit AnnualCreditReport.com to request the reports.

When it comes to what’s needed to build or maintain a healthy credit score – there are typically five key factors baked into the mix. One of the most important? That would be your credit utilization ratio. And while it may sound complicated, it’s pretty straightforward. 

What’s a Credit Utilization Ratio, Exactly?

Everyone who uses credit (even if it’s just one or two cards) has something called a credit utilization ratio (which is simply your credit usage).  It’s the difference between the amount of credit you have available when you add up all your credit lines, and what you’re actually using, when you add up all of the balances on those cards.

Let’s Do a Simple Example

Say you have two credit cards:

Card #1. Balance of $1,000 and a limit of $2,000.

You are using 50% of the available limit or a credit utilization ratio of 50% for that card. When you add another credit line into this scenario it changes things a bit.

Card #2. Balance of $400 and a limit of $1,000.

That means your credit utilization ratio is 40% for that card. 

When you add both account balances together, you’ve used $1,400 of the $3,000 in total available credit. Which means your total credit utilization ratio is 46.67%. And while less than 50% may not seem like too much to you, lenders typically don’t see it that way.

The 30% Tipping Point 

To maintain a healthy score (in a range spanning from 300 to 850), you need to aim to use between 10% and 30% of your available credit. You read that right. Use more than 30% for more than one billing cycle and your credit score can suffer.

Why Do Lenders Care About Utilization?

Lenders tend to think that people who carry higher balances – without paying them off at the end of the month – may not always be able to make prompt payments, or worse, they may stop making payments altogether. That makes someone with more than a 30% utilization ratio a bigger risk in their book.

Strategies to Lower Your Credit Utilization

There are a few things people can do to lower their credit utilization ratio.

• Cap Card Spending. One tactic is to make sure you don’t spend above 30% of your credit limit on any revolving account. That means when you get close to that on a certain card, stop using that card and opt for another one. 

Sarah Cain, Senior Vice President of Communications at VantageScore, says spreading credit card debt across different credit cards can benefit some consumers and not others:

“The possible advantages of spreading credit card debt across cards include creating a higher total of available credit, lowering total card utilization, and increasing the number of active cards, which could be seen as good credit management practice.” - Sarah Cain, VantageScore SVP of Communications

Any Pitfalls With ‘The Spread Out’ Strategy?

On the flip side, this won’t work for everyone. Cain says there are potential disadvantages of spreading credit card debt across multiple cards including creating a higher number of credit cards with balances exceeding a certain threshold.

In other words, you would potentially have a larger number of highly utilized credit cards – and that could indicate what’s known as a ‘credit-seeking behavior’ on the part of the consumer. This, she notes, could signal difficulty managing existing credit cards and could negatively impact your credit score.

The Bottom Line

Understanding the factors that impact your credit score, and making solid financial decisions – such as paying all of your bills on time every time, and limiting spending on credit cards as much as possible – can help you forge a path to improved financial health. 

With reporting by Casandra Andrews