August 14th 2023.
What is the Credit Utilization Ratio?
The Credit Utilization Ratio is the ratio of how much of your available revolving credit you are currently using. It is also referred to as the debt-to-credit ratio, credit usage, credit usage rate, or credit utilization rate. It is calculated by taking your current credit balances and dividing them by your total credit limits.
For example, if you have a balance of $1,000 on a credit limit of $10,000, your credit utilization ratio will be 10%.
Experts recommend keeping credit usage below 30% in order to maintain a good credit score. Keeping credit usage below 10% is ideal and can help raise a low credit score or help move a good score into the exceptional range.
Revolving Accounts vs. Installment Loans
Credit scoring models only factor your revolving credit accounts into credit utilization. These accounts are called “revolving” because they don’t have an end date – the amounts owed carry over or “revolve” month to month. You pay interest on the balance each month.
In addition, revolving credit accounts replenish as you repay what you draw. You can continue to draw from the credit line indefinitely if you don’t max out the credit limit and are in good standing.
Installment loans, such as mortgages or student loans, carry fixed payments. Installment loan balances are not calculated in credit utilization.
How do I Calculate my Credit Utilization Ratio?
Calculating your credit utilization is fairly simple. Take your current credit card balances and divide them by your total available credit limits. The formula is:
Credit utilization ratio = Your Total Debt ÷ Your Total Available Credit
So, for example, if you have $3,000 in debt and $12,000 in total credit limits, you would calculate your credit utilization by dividing $3,000 by $12,000, which is 0.25 or 25%.
Total Credit Utilization vs Per-Card Utilization
If you have more than one credit card, you can calculate the utilization ratio for each card, called your per-card utilization. Add up all your credit card account balances and the credit limits of each card to calculate overall credit utilization.
How does Credit Utilization impact Credit Scores?
Credit utilization is the second most significant factor for FICO scores. Payment history is the most important factor, making up 35% of the score, with credit utilization comprising 30%. The other factors are length of credit history (15%), credit mix (10%), and new credit (10%).
The higher your credit utilization ratio, the more it lowers your credit score. For example, a credit utilization ratio of 80% will lower a score more than a ratio of 50%. On the other hand, a low credit utilization rate can help raise your credit score. The exact impact depends on other factors, like your payment history.
If your credit utilization reaches 100%, it means you’ve maxed out your available credit. This could significantly hurt your credit score and ability to take out new credit. Credit scoring models interpret a low credit utilization ratio as a sign of responsibility when managing spending habits.
How can I lower my Credit Utilization Ratio?
There are a few ways you can lower your credit utilization. Paying off your revolving credit balances is the safest and most reliable way to reduce credit utilization. You can also ask your credit card issuer to increase your credit limit, open additional credit cards, or consider a balance transfer card or debt consolidation loan.
What is the Credit Utilization Ratio?
The Credit Utilization Ratio is the percentage of your current revolving credit in use compared to the total credit limit. It's also known as the debt-to-credit ratio, credit usage, credit usage rate, or credit utilization rate. To calculate it, you add up all of your current credit balances, and then divide it by your total credit limit.
For example, if you have a credit limit of $10,000 and a balance of $1,000, your credit utilization ratio is 10%. It's important to note that this ratio considers only revolving credit accounts, such as credit cards, and not installment loans, such as mortgages.
Experts recommend keeping credit usage below 30% to maintain a good credit score. Ideally, keeping credit usage below 10% can help raise a low credit score or help move a good score into the exceptional range.
How do I Calculate my Credit Utilization Ratio?
To calculate your credit utilization ratio, you take your current credit card balances and divide them by your total available credit limit. The formula is:
Credit utilization ratio = Your Total Debt ÷ Your Total Available Credit
So, for example, if you have a total debt of $3,000 and a total available credit limit of $12,000, your credit utilization ratio would be 25%. It's also possible to calculate your per-card utilization for multiple credit cards. To do that, you add up all your credit card account balances and the credit limits of each card to calculate your overall credit utilization.
How does Credit Utilization Impact Credit Scores?
Credit utilization is the second most significant factor for FICO scores. It makes up 30% of the score, second only to payment history, which makes up 35%. Other factors are length of credit history (15%), credit mix (10%), and new credit (10%).
The higher your credit utilization ratio, the more it lowers your credit score. For example, a credit utilization ratio of 80% will lower your score more than a ratio of 50%. Conversely, a low credit utilization rate can help raise your credit score.
Credit utilization of 100% means you've maxed out your available credit. This can significantly hurt your credit score and make it difficult to take out new credit.
How can I Lower my Credit Utilization Ratio?
There are several ways to lower your credit utilization ratio. The safest and most reliable way is to pay off your balances. Best practices state that you should pay off your monthly balance to avoid accruing interest and reporting credit card usage.
Another option is to ask your credit card issuer to increase your credit limit. If your account is in good standing and you regularly use the credit line, you have a better chance of getting an increase. This will reduce your credit utilization ratio.
You can also open additional credit cards, though this should be done with caution. You may be tempted to spend more money using the new card, which would only increase your debt and credit utilization. Additionally, opening a new card usually requires a hard credit inquiry, which can lower your FICO score by 5 points.
You could also consider a balance transfer card or debt consolidation loan. Balance transfer cards allow you to move your current balance onto the new card, while debt consolidation loans move your debt balances to an installment loan balance. Both of these will significantly reduce your credit utilization.
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