When was the last time you checked your credit utilization ratio? If you’re planning to apply for a loan or line of credit in the near future, you should consider checking it. An excessively high credit utilization ratio can make it difficult to get approved for loans and lines of credit.
A Crash Course on Credit Utilization Ratio
What Is Credit Utilization Ratio?
Also known as credit utilization rate, credit utilization ratio is a metric for how much credit you are currently using relative to your available credit. It’s typically expressed as a percentage. The more credit you are using, the higher your credit utilization ratio will be.
How to Calculate Credit Utilization Ratio
Credit utilization ratio has nothing to do with credit scores. Whether you have a poor, average or excellent credit score, it won’t have any impact on your credit utilization ratio. How do you calculate your credit utilization ratio exactly?
You can calculate your credit utilization ratio by analyzing your credit usage relative to your available credit. Take the total amount of credit you are using and divide that number by your available credit. To convert this new number into a percentage, multiply it by 100. If you are using $10,000 of credit out of $100,000 of credit, for instance, your credit utilization ratio would be 10%.
Tips to Lower Your Credit Utilization Ratio
Generally speaking, a low credit utilization ratio is better than a high credit utilization ratio. It means you have plenty of available credit. Therefore, you’ll have an easier time getting approved for loans and lines of credit. Lenders will see that you aren’t using most or all of your available credit, so they’ll be more likely to approve your application.
For a lower credit utilization ratio, try to pay down your credit cards and lines of credit. Maintaining low balances on revolving credit accounts will have a positive impact on this metric. It won’t affect your available credit. Rather, paying down your revolving credit accounts will result in less “used” credit, which in turn will lower your credit utilization ratio.
You an also achieve a lower credit utilization ratio by obtaining more credit. Opening new credit cards and lines of credit will result in more available credit. And the more credit you have available, the lower your credit utilization ratio will be.
In Conclusion
While most people are familiar with their credit scores, many of them overlook their credit utilization ratio. Credit utilization ratio provides insight into credit usage. It’s the percentage of credit you are using out of your available credit.
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