Credit Utilization Ratio
Your credit utilization ratio is a factor that affects your credit score. It measures the percentage of available credit you’re currently using. Since a lower credit utilization ratio can make it easier for you to qualify for loans and credit cards, you should work to improve yours if it’s too high. Read on to learn what you should know about your credit utilization ratio.
How your credit utilization ratio works
Also known as your credit utilization rate, your credit utilization ratio shows the amount of credit you’re currently using divided by the amount of credit you have available. It applies to all types of revolving credit accounts, such as credit cards and personal lines of credit. In most cases, your credit utilization ratio is a percentage.
How does my credit utilization ratio affect my credit score?
When credit scoring models calculate your credit score, they usually consider your credit utilization ratio. In fact, this ratio accounts for up to 30% of your credit score, making it very important.
What is a good credit utilization ratio?
The lower your credit utilization ratio, the better. This is because a lower ratio shows you’re responsible with credit and don’t overspend. FICO and VantageScore credit scoring models recommend that you keep your credit utilization ratio at 30% or lower. So, if your total credit limit is $5,000, your total revolving balance should be no more than $1,500.
How to calculate your credit utilization ratio
To calculate your credit utilization ratio, follow these steps:
- Add up the balances on your revolving lines of credit. These can include your credit cards, personal loans, and home equity lines of credit.
- Add up the credit limits on your revolving lines of credit.
- Divide the total balance by your total credit limit.
- Multiply by 100 to convert your credit utilization ratio into a percentage.
How to improve your credit utilization ratio
If your credit utilization ratio is too high, here are some tips to improve it.
Pay down your debt
The ideal way you can reduce your credit utilization ratio is by paying off your balances. If possible, try to get your balance to $0. You’ll enjoy a better ratio and save some money on interest.
Request a higher credit limit
Contact your credit card companies or lenders to ask for a limit increase on your accounts. Just be sure to avoid spending the extra money, or you’ll boost rather than lower your ratio.
Open a new credit account
Adding a new credit card is an easy way to lower your credit utilization ratio. Plus, you can enjoy sign-up bonuses and other perks, like cash back and travel points.
Leave old accounts open
Closing a credit card account will lower the amount of your available credit and in turn, take a toll on your credit utilization ratio. That’s why it’s wise to keep old accounts open whenever you can.
Benefits of lowering your credit utilization ratio
It takes time and effort to lower your credit utilization ratio, but it’s sure to pay off. By reducing your ratio, you’ll boost your credit score and open the doors to better credit cards and loans in the future. You’ll find it easier to meet various financial goals, like buying a house or car.
Start improving your credit utilization ratio
Your credit utilization ratio shows how much credit you’re currently using. It’s a good idea to keep it to no more than 30%. If you don’t have a good credit utilization ratio and need fast funds, not to worry. Advance America offers a variety of loans for borrowers with most credit scores, including payday loans, installment loans, title loans, and lines of credit. Visit Advance America to learn more about the loans we offer and fill out your application today.