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Understanding Your Credit Utilization Ratio

Credit Utilization RatioHave you ever heard the phrase, too much of a good thing , when something went wrong? Well, this adage definitely applies to your use of credit cards. Specifically, spending too much on your credit cards can be too much of a good thing when it comes to your credit score. Whether you have one credit card or five, whether your credit limit is $500 or $5,000; lenders expect you to spend responsibly. Part of that means not using too much of your available credit.

In fact, this notion of limited spending is one of the primary factors contributing to your credit score. Commonly referred to as a credit utilization ratio, its the amount of outstanding debt you carry on your credit cards, when compared to your overall credit limit. A utilization rate of more than 30 percent may you to lose several points. On the other hand, using less than 30 percent will earn you points.

Calculating Your Credit Utilization Ratio

Its a good idea for you to calculate your rate, so you know where you stand and can make any needed adjustments. To do so, divide the total amount of your credit card balances by your total credit limits.

For example:

  1. Lets assume you have two credit cards, each with a credit limit of $10,000. Your total credit limit would be $20,000.
  2. Now, lets say you are carrying a balance of $4,000 on one card and $6,000 on the other. Your total balances add up to $10,000.
  3. To calculate your rate you divide your total credit balance of $10,000 by your total credit limit of $20,000, to get a credit utilization rate of 50 percent.

How High Should My Credit Utilization Be?

A credit utilization rate less than 30 percent is most beneficial to your credit score. If that's easy for you, try to get it less than 20 percent! For those who are already using more than whats recommended, it wont necessarily be easy, but focus on paying down your debt. While its challenging to pay off debt, it will definitely be worth it! A low utilization rate is so significant to your score, you will be glad you got rid of some of that debt.

Manage your credit utilization rate by following a few suggestions below:

  • Know what you spend on your credit cards each month. If you are already exceeding the recommendation utilization rate: stop spending and start paying it off!
  • Know what your total credit limit is, so you can spend accordingly.
  • Never max out your credit cards, even if you pay your bills off completely, it could still be reported to the credit bureaus.
  • Utilize cash and debit cards to round out your spending.

For as significant a factor to your credit score as this is, it is a fairly easy one to control. Check your limits and then be sure to keep your spending in check. If you've got any balances, work to reduce them to a recommended level.

This post first appeared on Credit Zeal, please read the originial post: here

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Understanding Your Credit Utilization Ratio


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