A Big Ratio

The ins and outs of credit utilization ratio

One of the biggest factors impacting your credit score is the credit utilization ratio. This is your total credit used divided by your total credit available. Your best strategy when dealing with this ratio is to keep it below 30 percent. If it goes above that number, you could be in trouble.

Credit Score Components

Your credit utilization ratio is made up of revolving credit — so any lines of credit and credit cards. It does not include loans, like a mortgage or student loan debt.

Example: If you have two credit cards with a total of $20,000 credit available ($10,000 on each card), and you have a $2,000 balance on one of the cards and $1,000 on the other ($3,000 credit balance), your total credit utilization ratio is 15%.

  • Credit Card 1 $10,000 limit / $2,000 balance
  • Credit Card 2 $10,000 limit / $1,000 balance
  • Total Balance $3,000
  • Total Credit Limit $20,000
  • Ratio Calculation $3,000/$20,000 = .15 or 15%

That’s pretty good. A low ratio indicates to lenders and credit bureaus that you are handling your credit wisely, and not overspending. You must try to keep this percentage low.

Here’s what TransUnion and VantageScore consider when coming up with that magical three-digit number:

  • Payment history (40%)
  • Amounts owed (23%)
  • Length of credit history (21%)
  • Credit mix (11%)
  • New credit (5%)

“Amounts Owed” is where your ratio comes into play. Keep your credit utilization ratio below 30 percent and your credit score will be higher.

If your ratio goes above 30 or even 50 percent, your credit score could drop by double-digit points. When your score goes down by that much, you’ll find it harder to secure loans, you’ll get higher interest rate offers on credit cards, and much more.

Keep Credit in Mind

Keep your credit utilization ratio in mind to maintain healthy finances. Try to pay off your credit cards in full each month. If you have a heavy spending month that you know you will blow your ratio, consider paying your bill mid-month to bring it down. Keep cards open that you don’t use (if they don’t have an annual fee) anymore. You can even ask for a credit limit increase on your cards. Keep your ratio low and your finances will be easier to handle.

Chris O'Shea

Powered by: SavvyMoney