The Importance of Your Credit Utilization Ratio

Your credit score is a significant component of your financial stability, and it affects your ability to secure favorable lending terms when you need them. One essential factor that goes towards your credit score is your credit utilization ratio.

What is Credit Utilization Ratio?

The credit utilization ratio is simply the amount of credit you are using versus the amount of credit available to you. In other words, it's the ratio between the total balances owed and the total credit limit across all of your credit cards.

How is Credit Utilization Ratio Calculated?

The credit utilization ratio is calculated by dividing your total credit card balances by your total credit card limits. For instance, if you have a total credit line of $10,000 and you owe $2,000, your credit utilization ratio is 20%.

Why is Credit Utilization Ratio Important?

Lenders use the credit utilization ratio to determine how well you manage your credit. A high ratio indicates that you may be a risky borrower who has a higher chance of defaulting on payments. On the other hand, a low ratio tells lenders that you are responsible with your credit and can likely repay debts on time.

What’s a Good Credit Utilization Ratio?

Ideally, you want to keep your credit utilization ratio as low as possible. A good target is to keep it below 30%, but the lower you keep this ratio, the better it is for your credit score.

How to Improve Your Credit Utilization Ratio

If you have a high credit utilization ratio, it's time to start working on minimizing your debt. You can do this by paying off balances, increasing credit limits, and reducing overall expenses. By taking these steps, you can improve your credit utilization ratio and increase your credit score.