Sun. May 26th, 2024

If you are looking forward to knowing everything about the credit utilization ratio, you are in the right place. So, let’s get started with some basics.

Credit Card Utilization Explained

So, what is credit card utilization?

Credit card utilization ratio, or credit utilization ratio (CUR), refers to the amount of credit you use relative to your total credit limit. CUR measures how much of your available credit you use at any time. If you use all of your available credit, you have 100% utilization and max out your credit cards.

Factors That Impact the Credit Card Utilization Rate

The lender often dictates the maximum number of days allowed to pay a balance without being charged interest on that balance. Therefore, a high credit utilization rate can also indicate an individual’s risk for bankruptcy.

Other factors such as length of time with the current creditor, the total amount owed to creditors, and payment history also affect a person’s credit rating. The lower an individual’s outstanding debt, the better their odds of getting approved for additional loans or other forms of credit.

What Is The Ideal Credit Utilization Ratio?

As the experts at SoFi point out, “you should not exceed a 30% credit card utilization rate”. So if you have a $1,000 credit limit, you should keep your balance below $300. If you do not, then this may impact your credit.

Why Do I Need to Keep My Credit Utilization Ratio Low?

You want to be able to make timely payments so as not to incur late fees or penalty interest rates on your balance. However, utilizing too much of your available credit can also negatively affect your debt-to-credit ratio and thus negatively affect your overall creditworthiness.

What if I Have More Cards Than I Can Keep Track Of?

If you have more credit cards than you can keep track of, it’s important to focus on the cards with the highest balances first. You should also try to keep your overall balance below 30% of your credit limit to avoid damaging your credit score.

Can I Close My Unused Cards to Reduce My Credit Utilization Percentage and Improve My FICO Score?

Your credit utilization is the percentage of your available credit that you’re using at any given time. Let’s consider you have a credit limit of $1,000 and a balance of $500. Your credit utilization would be 50%.

Credit Utilization Formula Formula Debt / (Credit Limit + Available Balance)

Utilization ratios are calculated by dividing your current outstanding balance by the total of all your available balances. The formula is debt / (credit limit + available balance). The desired range is 30% to 50%. Anything over 50% can be problematic, but you should be fine if it’s less than 100%.

Suppose this percentage is too high for any reason, for example. In that case, because there has been an increase in the number of transactions or purchases, you may want to consider reducing the amount of spending on these cards until you get closer to that recommended 30%-50% range.

Credit utilization is one of the most crucial factors in determining your credit rating. Utilization measures how much of your available credit you use at any given time.

By Manali