Guide to Lowering Your Credit Card Utilization

How Using Your Credit Card Less May Affect Your Credit Score

Your credit utilization is the percentage of your overall credit limit that you’re using, and it can have a major effect on your credit score. As your credit usage decreases, it can positively affect your score since it shows you’re responsible with credit. On the flipside, high credit utilization can ding your score as it suggests you’re overspending

If you’re wondering how to lower credit card utilization, there are some steps you can take to do so and help build your credit score.

What Is Credit Card Utilization?

Credit card utilization, or simply credit utilization, is how much of your credit limit you’re using on your revolving credit accounts. You can calculate this percentage by taking the total of your credit card balances and dividing it by your total credit limit.

For instance:

•  Say you have two credit cards with limits of $3,000 and $5,000 respectively.

•  You have a balance of $600 on the first card and $1,000 on the second card.

•  By taking the total of your balances — $1,600 — and dividing it by your overall credit limit — $8,000 — and then multiplying by 100 to get a percentage, you’d end up with a credit utilization rate of 20%.

Why Does Your Credit Utilization Matter?

When it comes to your credit score, scoring models look at various factors, including your credit utilization on both individual accounts and overall. In other words, if your overall credit utilization is high, or one of your revolving accounts has a high balance, your score could be negatively affected.

Considering that credit utilization determines 30% of your FICO® score, which is the scoring model used by most lenders, it’s a major factor that affects your credit score.

What Is a Good Credit Card Utilization Rate?

As a credit card rule, you should aim to keep credit utilization under 30%. While this is the baseline, the lower your credit utilization is, the better. Many financial experts recommend keeping that figure closer to 10%.

A lower credit utilization rate demonstrates to lenders that you are responsible with your credit and don’t appear to rely on credit too heavily.

Tips for Lowering Your Credit Card Utilization

The good news is that you can raise your credit score relatively quickly just by lowering your credit utilization. Here’s how to lower credit utilization.

Paying Down Your Balance

Making payments before the due date arrives or the billing cycle ends could mean your balance goes down before your credit card issuer reports the amount to the credit bureaus. You could even make a payment right after your purchase goes through.

Having a lower credit card balance lowers your credit utilization, even if your credit limit remains the same.

Cutting Down on Spending

Budgeting carefully and reducing your spending could prevent you from racking up excessive credit card debt and getting stretched too thin financially.

However, that’s not to say you can’t use your credit card. Rather, limit your spending to what you can afford to pay off in full that billing cycle. Additionally, if you find your debt starting to balloon, consider pausing your credit card usage until you’ve gotten your balance under control so your credit utilization isn’t pushed higher.

Paying off Credit Card Balances With Personal Loans

If you’re carrying a balance on a credit card, one option to pay it off is taking out a personal loan. You could qualify for a lower interest rate, which can make the debt easier to get a handle on paying off. Plus, a personal loan is an installment loan, which means it won’t count toward your credit utilization.

However, you need to make sure you can still afford the payments and can qualify for competitive rates and terms. Some lenders may charge an application or origination fee — take this amount into consideration when deciding whether it’s worth going this route.

Requesting a Credit Limit Increase

Increasing your credit card limit can lower your credit utilization even if your outstanding balance remains the same. To get a credit limit increase, contact your credit card issuer to request one, either by calling the number listed on the back of your card or logging onto your online account.

Keep in mind that your credit card issuer may not approve your request. You may have to meet certain criteria to qualify, such as having a history of on-time payments and responsible credit usage.

Opening a New Credit Card

Opening a new credit card can increase your overall credit limit and therefore potentially lower your credit utilization. Keep in mind that you most likely won’t know what your credit limit will be until you’ve been approved for the card. 

Plus, submitting an application generally triggers a hard credit inquiry, which could have an effect on your credit score.

Avoiding Closing Unused Cards

It might sound logical to close credit cards that you haven’t been using, but doing so could have negative consequences. More specifically, closing a credit card lowers your overall credit limit, which could increase your credit card utilization even if your credit card balance remains the same.

Recommended: What is the Average Credit Card Limit?

Becoming an Authorized User

You could ask your spouse, family member, or close friend to add you on their credit card as an authorized user. If the primary cardholder maintains a low balance and has a high credit limit, it could lower your overall credit utilization.

Before going this route, however, speak with the primary cardholder to determine whether becoming an authorized user will help your credit score. You’ll also want to be clear on how you plan on using the card, or if you’d rather be a cardholder in name only.

Finding Out Whether Your Issuer Reports to Credit Bureaus

Most credit card issuers will report your payment activity and account balance every 30 days to the credit bureaus, though the reporting date might not coincide with your payment due date. If your card issuer reports your payment activity before you make a payment, it could look like you have a high balance, which could increase your credit utilization rate.

To remedy this, contact your card issuer to determine when it reports to the credit bureaus. Aim to pay off as much of your balance as you can before that, or request a new due date that’s ahead of when your issuer reports to the bureaus.

How Will Lowering Credit Utilization Affect Your Credit Score?

If you lower your credit utilization, you could build your credit score. Remember, your credit utilization is one of the major factors that affects your credit score. Aim to keep your credit utilization well below 30% — try using any of the methods mentioned above to do so — in order to help maintain your score.

The Takeaway

Credit utilization — the percentage of your overall credit limit you use — can have a major effect on your credit score. It’s best to keep your utilization as low as possible, but the benchmark generally recommended is that it should reach no higher than 30%. If your credit utilization rate has crept up, there are some tactics you can try to lower it, from paying down your balance to getting a new card.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How can I fix high credit utilization?

You can decrease your credit utilization by paying off your balances early, asking for a credit limit increase, applying for a new credit card, and cutting down on spending.

How can I keep my credit utilization below 30%?

You can keep your credit utilization below 30% by watching your spending and balances across all your credit cards.

How low should I keep my credit utilization?

It’s best to keep your credit utilization below 30%. That being said, the lower your credit utilization rate, the better.

Does zero utilization hurt your credit score?

Zero utilization doesn’t hurt your credit score. However, 0% utilization doesn’t necessarily help your credit score either, as you can’t demonstrate on-time payments and other positive credit behavior.


Photo credit: iStock/Farknot_Architect

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Does Auto Insurance Roadside Assistance Cover Keys Locked in a Car?

Does Auto Insurance Roadside Assistance Cover Keys Locked in a Car?

Roadside assistance coverage is designed to help motorists in trouble get back on the road. That usually includes helping drivers who have locked their keys in their car. Keep in mind that some plans place an annual limit on the number of calls for service or the amount they’ll reimburse you for specific services — including lockout assistance.

Read on for more information about what to expect when you sign up for auto insurance roadside assistance.

How Much Does It Cost to Unlock a Car?

If you don’t have roadside assistance and lock your keys in the car, expect to pay as much as $300 to have a locksmith come to your aid. The price varies depending on several factors, including the time of day, age and model of your car, and how far the locksmith has to drive. If you’re close to where the locksmith is working and your call comes in during normal business hours, the cost could be closer to $75 to $150.

There may be additional fees, however, if you’ve lost your key completely (rather than locking it in the car) and the locksmith has to cut a new one for you.

But if you do have roadside assistance coverage, all or some of the cost could be covered. Some plans cover getting you back into the car, for example, but not the cost of a replacement key, key fob, or repair of a damaged keypad.

Recommended: Ways to Save Money on Car Maintenance

Should You Call Roadside Assistance to Unlock Your Car?

When deciding whether to call roadside assistance to unlock your car, think safety first. If you’ve had an accident, locked a pet or child in the car, or feel in danger in some way, make 911 your first call.

But if you feel safe, roadside assistance is probably your best bet. You’ll get help quickly and with the least amount of risk to you, any passengers, and your vehicle. (Just remember to program the number into your phone.)

Common Roadside Assistance Service Benefits

Roadside assistance can be useful when you’re stranded on the side of the road and need a repair or some other type of service. This can be especially important for seniors, new drivers, people with a physical disability, and parents of young children.

Here are some of the most common circumstances for which a motorist might use roadside assistance:

Towing

If your car can’t be quickly or safely repaired or restarted where it is, roadside assistance can have it towed to a nearby qualified repair shop.

Battery Jump-start

Roadside assistance can jump-start a dead battery. In some cases, they may be able to install a new battery on site.

Flat Tire Change

Sometimes it just isn’t possible to get out and change your own tire on the roadway. Roadside assistance providers are trained to take care of flats on scene — if you have a spare available — or have your car towed to a location where the tire can be changed.

Emergency Fuel or Electric Car Battery Charge

If you run out of gas, roadside assistance may offer free fuel delivery to your location. And if the battery on your electric vehicle needs a charge, you may be able to have your car towed to the nearest charging station at no cost. (However, expect to pay for the fuel or the battery charge.)

How to Choose the Right Roadside Service Provider

Before you go shopping for coverage, check to see if it’s already provided by your auto insurance, vehicle manufacturer, credit card company, or an organization with which you’re associated. Customer reviews can indicate how reliable a provider is.

Be aware that some plans that come with a new car cover you for only a limited period of time, from a few months (as with a free trial) to a few years (such as the length of your limited warranty).

Roadside assistance is typically offered for an annual fee. Some plans provide only the basics (which usually includes lockout service), while others offer several tiers of benefits. When choosing your level of coverage, know that cheaper plans often have lower limits on the numbers of calls you can place, or cover only a portion of towing and other services. Read the fine print to make sure you understand what you’re getting. It can also help to get up to speed on how car insurance works.

Has your insurance gone up after an accident? If you’re doing some personal insurance planning, see whether a new auto policy might fit in your overall strategy.

Recommended: How to Lower Your Car Insurance

Ways to Get Your Car Open If You’re Locked Out

Locking your keys in your car is a maddening experience, especially when you’re running late or alone in a dark parking lot. If you’re stressed out, you may want to call for help right away. But if you’re up for trying a DIY break-in, here are a few tips.

Use a Wire Hanger

If your car has a manual lock, you can try threading a hanger or similar tool through the rubber gasket around the driver’s side window and into the door frame to pull up the lock-pin. Keep in mind that this method can damage your car, which could cost more than waiting for a pro.

Go Through the Trunk

If your trunk is open, you might be able to access the backseat. Check to see if there’s a panel you can push that allows you to crawl through to the car’s main interior.

Turn Your Phone Into a Digital Key

If you’ve already added a digital car key to your smartphone, now is the time to try it out!

Get the Key Code to Make a New Key

After the roadside assistance service person verifies that the car you want to get into is yours, he or she may be able to get the key code from the manufacturer or dealer (or by using decoding tools) and cut you a new metal key.

Recommended: What’s the Cheapest Way to Rent a Car?

The Takeaway

For an annual fee, roadside assistance programs typically cover a wide range of problems that befall motorists. The most common service calls are lockouts, flat tires, battery jump-starts, and emergency fuel delivery when you’ve run out of gas. Though insurance coverage varies, most plans consider lockouts a basic service. But you should check the fine print on your plan to verify what’s included.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

SoFi brings you real rates, with no bait and switch.

FAQ

How does roadside assistance open a locked car?

A roadside assistance service provider will likely have several different tools available to pop or pick a car lock, or they may be able to cut a new key for you. If all else fails, your car can be towed to a location where the car can be worked on.

What should you do if your car is locked and the keys are inside?

If you’ve locked in a child or pet, or you feel in danger, call 911 right away. But if you feel safe and you’re looking to get help quickly and with the least amount of risk to you and your vehicle, a call to roadside assistance can be a good choice.

Can 911 help with locked keys in a car?

911 was created to deal with emergencies, and it will be up to the dispatcher to decide how to prioritize your call. If an officer is dispatched, or if one sees you stranded and pulls over to help, you still may have to wait for a locksmith with the proper tools or a tow truck.


Photo credit: iStock/ronstik

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What to Know about Credit Card Cash Advances

What to Know about Credit Card Cash Advances

Sooner or later, most of us hit that moment where we need some cash — and fast. Maybe a major car repair or medical bill arrives, you get laid off, or you simply overspend for a period of time: All are ways that you can unfortunately find yourself in a hole financially.

A particularly expensive (or unlucky) month might make a credit card cash advance seem appealing. But before you go ahead and get a bundle of bills from your credit card issuer, read up on the consequences of doing so.

Can You Get Cash Back from a Credit Card?

Yes, it’s possible to get a cash advance on a credit card. But just because you can do something doesn’t always mean you should.

A credit card cash advance is a stopgap for a financial emergency that can come with high costs to a person’s immediate financial situation. Furthermore, if not paid back quickly, it may also affect their credit history in the long term.

While a cash advance is certainly easy (it’s similar to making an ATM withdrawal from your checking account), there are typically better and more affordable options for most financial needs.

A credit card cash advance is used to get actual cash against a credit card account’s cash limit, which might be different from the credit limit. It’s essentially a loan from the credit card issuer. Here’s how it usually works:

•   You put your credit card into an ATM, enter the card’s PIN, and choose an amount to withdraw. The cash is then dispensed for you to use as you see fit.

•   If you don’t know the card’s PIN, a cash advance can be completed by going into a bank or credit union with the credit card and a government-issued photo identification.

•   A cash advance check directly from the credit card company — sometimes included with mailed monthly billing statements — can also be used to get a cash advance.

Why Do People Use Cash Advances?

Why use a cash advance from a credit card? The bottom line: convenience and speed. ATMs are plentiful in most towns, and it takes just a few minutes to complete the process of getting a cash advance at an ATM. There’s no approval process required either.

Some people may assume they don’t have enough time to access other kinds of credit. This isn’t always true, however. For instance, funds obtained through an unsecured personal loan are sometimes available in just one to five days after approval of the loan.

As fast and simple as a credit card cash advance may seem, however, there are significant costs involved. Realizing the financial impact of these withdrawals may encourage a person to look elsewhere for funds.

Recommended: 39 Passive Income Ideas to Build Wealth

Cost of Withdrawing Cash from a Credit Card

A cash advance is an expensive way to borrow money. To put it in perspective, they’re just a step up from payday loans (which typically have much higher interest rates than credit card cash advances, extra fees, and short repayment terms). Here’s a closer look at how these expenses can pile up.

Cash Advance Fee

It’s typical for credit cards to have a fee specifically for cash advances. This fee can be anywhere from 3% to 5% of the total amount of the cash advance. This fee is added to the account balance immediately — there is no grace period.

Higher APR

The average APR, or annual percentage rate, a credit card issuer typically charges for a cash advance is quite a bit higher than normal purchase charges. Currently, the average credit card interest rate on purchases is almost 25%. But what is the APR for a cash advance? The rate is likely to be between 25% and a whopping 30% or more, according to recent research.

What’s more, unlike interest charged on regular purchases, there is no grace period for the interest to start accruing on a cash advance. It starts accumulating immediately and increases the account balance daily.

ATM Fee

Getting a credit card cash advance from an ATM may also mean incurring an extra fee charged by the ATM owner, if that’s not the financial institution that issued your credit card. These fees currently average $4.73 or so per transaction. As you see, the ATM fee can increase the charges for a cash advance, which often add up quickly.

Payment Allocation Rules

If you’re thinking that a cash advance can be paid off first and then the interest rate will revert to the lower rate charged on regular purchases, guess again. While federal law dictates that any amount more than the minimum payment made must go toward the highest interest rate debt, the minimum payment amount is typically applied at the credit card issuer’s discretion. This might well work in the card issuer’s favor, not yours.

Recommended: How to Increase Your Credit Limit

A Hypothetical Scenario

You might be wondering just what a cash advance looks like in actual dollars and sense, so let’s consider this scenario.

Say a person is carrying a credit card balance of $1,000 with an APR of 25%. Perhaps they are trying to financially survive a layoff and need funds, so they find out how to get a cash advance on their credit card and take out $1,000 with a 30% APR. When they receive the billing statement, they pay $1,000 toward their credit card balance.

The minimum payment due amount of $35 is applied to the regular purchases that are accruing interest at a rate of 25%. The remainder, $965, is applied to the cash advance balance that’s getting charged a 30% interest rate.

In order to completely get rid of that 30% APR, the account holder would have to pay the full $2,000 balance.

The cash advance will only be paid off when the entire credit card balance is paid in full, which means they could be setting themselves up with higher interest charges for a long time to come.

Waiting until the next monthly statement is available will just increase the amount due. Every day the cash advance accrues interest, it costs the cardholder more money. The faster the balance is paid off, the less interest will accrue.

Using a credit card interest calculator can be enlightening when figuring out how much purchases or cash advances will really cost with interest applied and how much time it might take to pay them off.

Personal Loans vs Cash Advances

Now you understand how to get a cash advance from a credit card and the expenses involved. So what are the alternatives to this kind of a cash advance? Ask friends or family for a loan? Find ways to make money from home?

While those options are certainly acceptable, an unsecured personal loan might also be an option for some people. These loans can allow you to get funds at a lower interest rate that you can use to pay off your high-interest debt. Here’s how they usually work:

•   An application for a personal loan online can typically be completed in minutes and, if approved, the borrower may possibly get the funds within a couple of days. Personal loans can be used for a variety of reasons.

•   Some common uses for personal loan funds are debt consolidation, wedding expenses, unexpected medical expenses, and moving expenses, to name a few. It’s even possible to use a personal loan to pay off that credit card cash advance, which may cost you a lot less in the long run.

There are several benefits to personal loans that are worth knowing about:

•   Personal loans are likely to offer a more manageable interest rate on the money borrowed than the typical interest rate on a credit card cash advance. Of course, the personal loan’s interest rate will depend on the borrower’s creditworthiness, but it’s likely to be lower than the one tied to a credit card cash advance.

•   When personal loans are used to pay off a cash advance, they can simplify a person’s debt. With a single personal loan, there is only one interest rate to keep track of, as opposed to juggling two high interest rates: one for the cash advance and one for regular purchases charged to the credit card.

•   Credit card debt is revolving debt, which means that the borrower’s credit limit can be used, repaid, then used again, as long as the borrower is in good standing with the lender. A personal loan, however, is installment debt, and has fixed payments and a fixed end date. Unlike the revolving debt of a credit card, the funds from a personal loan can only be used once, and then they have to be repaid.

Personal Loans and Credit Scores

Another upside of choosing a personal loan over a credit card cash advance is that responsibly managing a personal loan might positively impact the borrower’s credit score.

One factor that goes into calculating a FICO® Score is the percentage of available credit being used, the credit utilization ratio, and it accounts for 30% of a person’s total score.

In the hypothetical scenario above, if the borrower had a $3,000 credit limit on their credit card, by using $2,000 of their total available credit, their credit utilization rate would be a whopping 66% (if that one credit card was the only account appearing on their credit report).

It’s fairly typical that credit card users continue to make charges on their accounts, which is likely to keep their credit utilization ratio high.

Installment debt, such as a personal loan, is looked at in a slightly different way in credit score calculations. Making regular payments on an installment loan may carry slightly greater weight than might someone’s credit utilization rate in calculating their credit score. Thus, making regular payments on a personal loan is likely to demonstrate responsible borrowing as the balance is paid down.

As you’ve now learned, considering a variety of funding sources when you need money fast is a smart money move. When you do so, a credit card cash advance may well be seen as a last-resort maneuver.

The Takeaway

Life can certainly deliver some unexpected financial challenges now and then — moments when you need cash quickly, for instance, but don’t have any available. While a cash advance from your credit card may seem like a fast, simple solution, tread carefully. There are significant costs associated with this withdrawal which could leave you with more long-term debt than you’d like. It’s probably wise to explore your options first.

While money management can be tricky at times, partnering with the right financial institution can help improve your financial life.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

What is a credit card cash advance?

A credit card cash advance is a quick, convenient way to access cash using your credit card. You insert it into an ATM or visit a bank branch to obtain the cash. However, this will likely involve your owing significant fees and being assessed a considerable interest rate on the money you have borrowed.

What are the costs of a credit card cash advance?

A credit card cash advance will involve a fee that’s typically 3% to 5% of the total loan amount. In addition, there may be an ATM fee of several dollars. The money that you are advanced begins to accrue interest right away, and this usually is at a higher rate than your rate on purchases. What is a cash advance APR usually? Between 25% and 30%.

What is the difference between a credit card cash advance and checking account withdrawals?

A credit card advance is significantly different from a checking account withdrawal. With a credit card advance, you are quickly getting access to cash from your credit card issuer. It is a form of a loan, and your interest rate will likely be between 25% and 30% until it’s fully repaid. With a checking account withdrawal, you are accessing your own money, so there’s no interest fee involved, though you might be charged a several dollars if you use an out-of-network ATM for the transaction.


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*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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How to Build Credit Over Time_780x440

10 Strategies for Building Credit Over Time

Broadly speaking, the best way to build credit is actually quite straightforward: Be the kind of borrower you’d want to lend to. While that might sound simple, it isn’t always second nature to know exactly how to go about doing that. For instance, you might know it’s critical to make payments on time, but you might not be aware that it’s important to keep your unused credit cards open.

If you’re setting out on your journey toward building credit, here’s a rundown on how to build credit, with 10 strategies you can stick to.

Strategies for Building Credit

1. Acquire Credit

Perhaps the first crucial step in how to build credit is to acquire credit accounts. For someone who does not have a credit history of their own, getting a co-signer or becoming an authorized user on an established cardholder’s account can help you get started. You might also consider a secured credit card or applying for a credit card designed specifically for students. Or you can look into a credit-builder loan.

In the long run, however, you’ll be in a much stronger position if you can borrow in your name alone. Establishing credit of your own can make it easier to borrow in the future for such things as an auto loan, a personal loan, or even a mortgage.

2. Pay Bills Consistently and On Time

Timely payments are crucial, and making at least the minimum payment each month on a revolving credit line can make a positive impact on your credit score.

That’s because payment history makes a bigger impact on a person’s credit score than anything else. A borrower’s credit score summarizes their health and strength as a borrower, and payment history makes up 35% of that score on a credit rating scale. So the most important rule of credit is this: Don’t miss payments.

Many lenders will actually allow you to customize due dates so they line up with pay dates, and most let you set up automatic payments from a checking or savings account. Take the time to find what works for you to make your payments in a timely fashion.

Recommended: When Are Credit Card Payments Due?

3. Manage Your Credit Utilization Rate

The further away a person is from hitting their credit limit, the healthier their credit score will be, in most circumstances. A borrower’s debt-to-credit ratio, also known as the credit utilization rate, should ideally be no more than 30%. Higher utilization rates can negatively affect a person’s credit score.

Paying revolving credit lines in full each month can have a positive impact on your credit score because doing so essentially lowers your credit utilization rate. Additionally, keeping tabs on your credit utilization rate before continuing to swipe is key to using a credit card wisely.

4. Keep Unused Credit Cards Open

Lenders want to see accounts maintained in good standing for a long time. As such, a credit history looks better when it has a solid number of accounts in good standing that have been open for a while. When debt accounts are closed, that history ends, and eventually closed accounts drop off your credit report entirely.

To keep this from happening, avoid closing old credit cards, even if you’re not using them anymore. You might consider using these accounts to automate a few bills, like car insurance or a monthly subscription account, to avoid account closure due to inactivity.

5. Diversify Your Credit Mix

Having a diverse mix of credit products can also have a positive impact on a person’s credit, accounting for 10% of a credit score calculation.

Opening at least one credit card is a good step for most borrowers. Using a personal loan to finance a large purchase with a relatively low interest rate, and paying off that personal loan on time, can also have a positive impact on a person’s credit. Student loan refinancing can be another way to diversify your credit mix, while potentially lowering your interest rate.

However, while having a mix of credit can help your standing as a borrower, it’s not a good idea to open a line of credit that’s not needed just to increase your mix of credit types. Instead, stick to applying only for credit you actually need and that you’re confident you can afford to pay off.

6. Check Your Credit Report

It’s recommended to check your credit reports from the three major credit bureaus at least once a year. Doing a regular review of your reports is a good way to monitor your overall credit health and understand the impacts of different activities. It’s also important to make sure that everything listed in your credit report is accurate, and to flag any errors or fraudulent activity.

Where Can You Track Your Credit Score?

You can get a free copy of your credit report every 12 months from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Request your copy online by visiting AnnualCreditReport.com. Note that you can also request a copy anytime you experience an adverse action based on your credit report (like being denied for a loan), among other circumstances.

Checking your credit score is even easier. While it’s not included in your credit report, you can get your current score from your credit card company, financial institution, or on a loan statement. Another option is to use a free credit score service or site. If you’re tracking changes to your credit score, it’s helpful to know how often your credit score updates and then check in accordingly.

7. Limit Credit Applications

When making major life changes, like starting a job, getting married, or having children, sometimes multiple lines of credit might be helpful to get through it all. Financial institutions understand that, but they also know that, historically, people who borrow a lot of money at once from multiple sources tend to have more difficulty paying them back. Spreading out credit applications over time whenever possible typically has a lower impact on an overall credit score.

Recommended: What Is the Average Credit Card Limit?

8. Avoid Overspending

Perhaps one of the most effective ways to ensure you keep building your credit in the right direction is to only spend what you can afford to pay off. This will help you more easily maintain a lower credit utilization rate, and it can prevent you from racking up a balance and falling into a debt spiral.

Plus, if you pay off your balance in full each month, as opposed to only making the minimum payment, you can avoid incurring interest charges. This is a perk that’s foundational to what a credit card is.

9. Get Credit For Other Bills You Pay

If you’re early in your credit building journey, it can help to get credit for other payments you’re making on time, such as your rent payment, utility bills, or even streaming services fees. For instance, Experian Boost adds on-time payments in other accounts to your Experian credit report. There are also a plethora of rent-reporting services out there that will report your timely rent payments to the credit bureaus.

10. Pay Off Any Existing Debt

Another important strategy toward building credit is to pay down any debt you may currently have. Especially important when it comes to the time it takes to repair credit, saying goodbye to existing debt allows you to lower your credit utilization rate, which in turn builds your credit score. There are a number of tactics out there for paying off debt, from a debt consolidation loan to a balance transfer credit card.

What Is a “Good” Credit Score?

A “good” credit score is considered within the range of 670 to 739 under the FICO Score, the credit scoring model most commonly used by lenders. “Very good” is considered anywhere from 740 to 799, while “exceptional” is 800 and above.

Keep in mind, however, that these exact credit score ranges can vary a bit from model to model. For instance, in the VantageScore® range, a score of 661 to 780 is considered “good.” In general though, anything in the upper 600s is generally within the range of a “good” credit score.

How Long Does it Take to Build Your Credit Score?

According to Experian, one of the three major credit bureaus, it generally takes around three to six months of data to generate an initial credit score.

Credit card issuers typically don’t report account activity until the end of the first billing cycle, so it’s worth waiting a month or two before you check in on the status of your score. If you’re anxious to ensure your activity counts, it’s also a good idea to check with your issuer to make sure they report to the credit bureaus.

What Can You Do with “Good” Credit?

The importance of having good credit can’t be overstated. By building credit, you’ll have easier access to borrowing opportunities in the future, whether that’s an auto loan for a new car or a mortgage for a new home. A better credit score also allows you to secure better terms, such as lower interest rates and a higher borrowing capacity.

The Takeaway

As you can see, there are a number of ways to build credit. First and foremost, you’ll want to make sure you’re following the tenets of responsible credit usage, as these are arguably the best ways to build credit. From there, you can consider additional credit building strategies, such as ensuring that your on-time rent and utility payments count.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How long does it take to build credit?

Once you open your first credit account, it generally takes around three to six months to start building a credit score.

How do I establish credit with no credit history?

There are several ways to establish credit if you have no credit history. Some strategies to explore include becoming an authorized user on a friend or family member’s credit card account, applying for a secured credit card, applying for a retail card, taking out a credit-builder loan, and reporting your on-time rent and utility payments to the credit bureaus.

How can I improve my credit as quickly as possible?

Though it takes time to repair or build credit, there are some steps you can take. For starters, work on paying down credit cards with high balances. And be sure to pay your bills on time, every time. If you’re having trouble keeping track of due dates, consider setting up autopay or calendar reminders for yourself.


Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What Percentage of Income Should Go to Rent and Utilities?

What Percentage of Income Should Go to Rent and Utilities?

A common rule of thumb for renters states that no more than 30% of your income should go to rent and utility payments each month. This guideline dates back to housing initiatives introduced by the federal government in the 1960s.

Deciding what percentage of income should go to rent and utilities is central to making a realistic budget as a renter. The less you can spend on these items each month, the more money you’ll have to fund your financial goals. Read on for more about calculating a housing budget that’s right for you, as well as creative ways to cut your housing costs.

What Is the 30% Rule?

The 30% rule says that households should spend no more than 30% of their income on housing costs, including rent and utilities. This housing affordability advice dates back to the 1969 Brooke Amendment, which was passed in response to rental price increases and complaints about public housing services.

The Brooke Amendment capped rent for public housing at 25% of residents’ income. This measure was designed to offer financial relief to low-income households participating in public housing programs. In 1981, Congress increased the 25% threshold to 30%, where it has remained to the present day.

Recommended: Should I Sell My House Now or Wait

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What Is 30% Based on?

The 30% rule for housing affordability considers two distinct categories of costs: housing and utilities. For renters, this generally means rental payments and basic utilities such as electric, water, and heating. Collectively, these expenses should total no more than 30% of a renter’s gross monthly income.

Gross income is what someone earns before taxes and other deductions are taken out. Net income, on the other hand, is what they actually take home in their paychecks. Basing the 30% rule on someone’s gross income versus their net income will result in a higher dollar amount that should be allocated to rent and utilities.

It’s also important to remember that the 30% rule isn’t set in stone. The average monthly expenses for one person will vary depending on your location’s cost of living, optional costs like renter’s insurance, and whether you have a very low or high income.

If you need help managing your finances, online tools like a money tracker can help you monitor spending, set budgets, and keep tabs on your credit score.

Calculating the Percentage to Go to Rent and Utilities

Figuring out what percentage of income should go to rent and utilities using the 30% rule is a fairly simple calculation. You’d multiply your gross monthly income by 0.30 to figure out the maximum amount you should be budgeting for rent and utility costs. How complicated this calculation is can depend on how often you’re paid and whether your paychecks are always the same amount.

If You Are Paid the Same Amount Every Two Weeks

If you’re paid biweekly and your paychecks are the same, you can calculate your target rent and utilities in one of two ways. First, you take the gross amount reported on one of your paychecks and multiply it by 0.30. You then double that result to find the monthly amount.

So, say your biweekly gross income is $2,500. Thirty percent of that number is $750 ($2,500 x 0.30). If you double it, then your rent and utilities budget should be no more than $1,500 per month.

This strategy doesn’t take into account the two months in a year that there are three biweekly paychecks, however. If you want to find the average amount to spend on rent and utilities each month, you can multiply your biweekly gross paycheck amount by 26 (for 26 paychecks in one year), divide by 12 (for 12 months), then find 30% of that amount.

So using the $2,500 figure once again, if you multiply that by 26, you’d get $65,000. Divide that by 12 to get $5,417 (rounded up), your monthly pay. Thirty percent of that is $1,625, the amount you’d allocate to rent and utilities per month.

If You Are Paid Varying Amounts Every Paycheck

Pinpointing what percentage of income should go to rent and utilities can be a little more challenging if your paychecks aren’t the same from one pay period to the next. That might happen if you’re paid hourly and work different hours each week, receive vacation or sick pay, or part of your income is based on commissions.

In that scenario, you’d want to look at your annual income in its entirety. You can do that by looking at all of your pay stubs for the previous 12 months or checking your most recent W-2 form. Again, you’re looking at gross income, not net pay.

You’d take the gross income for the year, then multiply it by 0.30 to figure out how much of your pay should go to rent and utilities overall. If your gross annual income was $70,000, then your target number would be $21,000 for the year. Divide that by 12 and you’ll find that you should be spending no more than $1,750 per month on rent and utilities using the 30% rule.

How to Reduce Your Rent to 30% or Less of Your Income

If you’ve done the calculations and you’re spending more than 30% of your income on rent and utilities, there are some things you may be able to do to reduce those costs.

Split the Rent With Roommates

Taking on one or more roommates could ease some of the financial load. Remember, it’s important to have a written agreement in place specifying what percentage of rent and utilities each roommate is responsible for.

Also, determine who will pay the rent and utility bills when everyone is chipping in. For example, one person may volunteer to collect payments from everyone else and then cut a check to the landlord or utility company. Consider using a budget planner app to keep track of household bills and payments.

Recommended: 25 Tips for Sharing Expenses With Roommates

Consider a New Location

Moving is another possibility for lowering rent and utility costs if you’re relocating to an area with a lower cost of living. Rent in rural areas may be cheaper than in a trendy urban center, for example. There can even be significant variation in rents in different neighborhoods within the same city.

Keep in mind that relocating can have its trade-offs. For instance, living in a less expensive area may mean giving up certain amenities you enjoyed in your old neighborhood, like walkability or convenient access to stores and restaurants. And of course, you’ll also have to budget for the costs of moving, which can average $1,250 for a local move or $4,890 for a long-distance move.

Work Remotely

Working remotely can have its advantages, including saving money on certain expenses. For example, you may spend less on gas, meals out with coworkers, or office attire.

That said, if you are on a computer all day, you’ll want to take steps to lower your energy bill, such as unplugging at the end of the day and buying energy-efficient lights.

Opting for remote work could also save you money on rent if you’re able to become location-independent. When you’re not tied to a particular city, that frees you up to seek out cheaper areas to live. You could even forgo renting altogether and become a digital nomad. That has its own costs, but you’re not locked in to paying rent to a landlord or utility payments long-term.

Negotiate With Your Landlord

The most effective way to reduce your rent may be to go straight to the landlord and negotiate your rent. Your landlord may be willing to offer a discount or reduced rental rate under certain conditions.

For example, your landlord might agree to reduce your rent by 10% or 15% if you pay six months in advance or agree to a longer lease term. The prospect of guaranteed rental income might be attractive enough for them to offer you a better deal.

You may also be able to get a rate discount by offering to take care of certain maintenance and upkeep tasks yourself. If your landlord normally pays for lawn care, for example, they may be willing to let you pay less in rent if you’re working off the difference by cutting the grass and maintaining the property’s landscaping.

Ask for a Promotion or Find a New Job

Instead of attempting to reduce your costs, you could try a different tactic: Making more money means you can budget more for rent and utility costs.

Asking your boss for a raise or promotion might boost your paycheck. If you hit a dead end, you may consider a more drastic move and look for a higher-paying job. Taking on a part-time job or starting a side hustle can also help you bring in more money to cover rent and utility payments.

What to Consider if 30% Doesn’t Work for You

As noted above, the 30% rule for housing is a somewhat arbitrary number and may not work for everyone. Spending more than 30% of your income on rent and utilities doesn’t automatically mean that you’re living beyond your means, for a variety of reasons.

There are, however, a few actions you can take to streamline your finances and determine what percentage of income should go to rent and utilities.

Try the 50/30/20 Rule

The 50/30/20 budget rule recommends spending 50% of your income on needs, 30% on wants, and the remaining 20% on savings and debt repayment. This budgeting method doesn’t specify an exact percentage or dollar amount to spend on rent and utilities. Instead, those expenses get grouped into the 50% of income allocated to “needs”.

You still need to keep track of your spending to make sure you’re staying within the 50% limit. Using an online budget planner can help you figure out if the 50/30/20 rule is realistic based on your income and expenses.

Pay Down Loans and Debt

Total U.S. household debt reached $17.69 trillion in the first quarter of 2024, according to Federal Reserve data. While a big chunk of that is mortgage debt, Americans also pay a sizable amount of money to credit cards, student loans, personal loans, auto loans, and other debts.

Working to pay off debts can free up more money to allocate to rent and utilities. There are different methods you can use, including the debt snowball method and the debt avalanche.

Look for Cost Savings in Recurring Expenses

One more way to make shouldering higher rent costs easier is to lower your other expenses. Making small changes at home can lead to lower electricity and water bills. Cutting out subscriptions you don’t use, looking for a better deal on car insurance, and eating more meals at home instead of dining out are all simple ways to lower your expenses.

The Takeaway

If you’re spending 30% of your gross (before tax) income or less on rent and utilities, pat yourself on the back. You may spend up to 50% on housing if you have no debt and a healthy savings balance. The important thing is to look at your entire financial picture, including your income, debts, and goals, to decide the figure that’s right for you.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

SoFi helps you stay on top of your finances.

FAQ

What is a good percentage of income to spend on rent?

The 30% rule says that renters should spend no more than a third of their gross income on rent and utility payments. The less you can spend on rent and utilities, the more money you’ll have to fund other financial goals, like saving for emergencies, paying off debt, and planning for retirement.

Is 30% of income on rent too much?

Spending 30% of income on rent may be too much if a significant part of your income is also going toward debt repayment. That may leave you with little money to cover other necessary expenses or discretionary spending.

How much of your monthly income should go to rent?

A common rule of thumb says that roughly one-third of your monthly gross income can go to rent. But if you have substantial savings and no debt, you may be OK with spending a larger percentage of income on rent. On the other hand, if you’re trying to pay off debt or build savings, you may prefer to spend less on rent payments.


Photo credit: iStock/deliormanli

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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