What Is A Credit Utilization Ratio?

It has an enormous impact on your credit score but how much do you know about your credit utilization ratio?

What Is It?

Credit utilization ratio is the amount of debt you owe as a percentage of the amount of total credit you have been issued. Say you have two credit cards with a combined limit of $10,000 and you owe a total balance of $4,000 - your credit utilization ratio would be 40%.

Credit bureaus evaluate the credit utilization on each of your cards individually as well as totaled together, so its important to spread out your spending rather than maxing out one card.

How Does It Impact My Score?

Your credit utilization rate has a huge impact on your score regardless of which credit bureau you get a credit report from. With the FICO scoring model your credit utilization ratio makes up 30% of your credit score, just behind payment history at 35%.

This one statistic can drastically increase your score or drastically lower it all on its own.

What Is A Good Ratio?

For the most part your utilization should never go above 30% of your combined limits. In other words - the lower the better.

How Can I Lower Mine?

Oddly enough a way to lower your ratio is to get increases on your limits. If you ask for a credit increase, or open a new card your available credit goes up while your balance stays the same creating a more favorable ratio.

This only works is you can get approved and won't use the increased limit as an invitation for more spending. This is also why you shouldn't cancel old unused credit cards, their limit adds to the pool without contributing a balance.

But the more responsible way is to pay down your balances until you are under 30%. When making payments try to pay each cards balance equally or if you can't, focus on the one with the highest interest rate.

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