Understanding the importance of Credit Utilization can be game changer when it comes to managing your personal finances. Did you know that up to 30% of your credit score is determined by your credit utilization ratio? Keeping this ratio low can significantly make your score stronger.
Credit Utilization
Credit Utilization represents the percentage of your available credit that you’re currently using. This ratio uses your total revolving credit limits and balances to determine how much of your available credit is being utilized. For example, if you have two credit lines of $500 each for a total of $1000 in available balance, and you have a combined balance of $300, your credit utilization ratio would be 30%. This means you are using 30% of your available credit. Lenders use this number as a way to assess how responsible you are with your credit. Failure to keep the percentage low, and overextend yourself, you may give the impression that you are too reliant on credit, making you a risky borrower.
How to calculate your Utilization ratio
Step 1: Add up the total credit limit of all your revolving credit accounts, such as credit cards and lines of credit.
Step 2: Add up the total balances that you currently owe on those accounts.
Step 3: Divide the total balance by the total credit limit. This will give you your credit utilization ratio.
Step 4: Multiply the result by 100 to convert it into a percentage. This is your credit utilization rate.
Example: If you have a total credit limit of $2,000 and a total balance of $500, your credit utilization ratio is 500 ÷ 2000 = 0.25, or 25%.
Tips to lower your Credit Utilization ratio
Request a Credit Limit Increase
Increasing your credit limit will immediately lower your utilization rate as long as your balance stays the same.
Pay Off Your Balances More Frequently
Making multiple payments throughout the month can help keep your balance lower at reporting time.
Avoid Closing Old Credit Card Accounts
Keeping old accounts open helps maintain a higher overall credit limit, which lowers your utilization rate.
Spread Your Balances Across Multiple Credit Cards
Keeping low balances on several cards rather than maxing out one can help improve your utilization ratio.
Consider Consolidating Debt
Moving your balances to a personal loan or a balance transfer card can reduce your credit card utilization.
The ideal percentage
The less you owe, the better off you are in all categories. In general, most lenders look for utilization rates of their borrowers in the 30% range. We understand that some life events may arise, but if it is possible, try to keep it even lower than that. Ideally, maintaining a credit utilization ratio below 10% is even more beneficial and can make you stand out in a big way. At the end of the day, it’s always best to set financial goals for yourself to maintain control. Using clear objectives will help you make better financial decisions.
Frequently Asked Questions
Credit utilization accounts for up to 30% of your credit score. The lower your utilization, the better your score will be.
Paying off your balances or paying more than your minimum payment, if possible, can help quickly lower your credit utilization. Additionally, making extra payments throughout the month rather than waiting for the due date can help.
Applying for another credit card could actually help lower your credit utilization, as it increases your total available credit.
Closing a credit card reduces your total available credit, which can raise your credit utilization ratio.
If you owe a lot on your credit card, focus on paying down the balance as much as possible. Consider making more than the minimum payment to reduce your balance faster, and avoid making new charges until your debt is under control.
