Credit bureaus weigh several factors to calculate your credit scores. One important factor is your credit utilization ratio, or the percentage of your available credit you’re using.
How Is Your Credit Utilization Ratio Calculated?
Your credit utilization ratio is the sum of all your credit card balances divided by the sum of all your credit limits. For example, if you have balances that add up to $5,000 and you have three cards with credit limits of $10,000, $3,000, and $2,000, your credit utilization ratio is 33% ($5,000 divided by $15,000 of total available credit).
What Is a Good Target for Your Credit Utilization Ratio?
Though there is no hard-and-fast rule about how much credit you should use, the lower the percentage, the better. Credit bureaus generally recommend that consumers aim for a credit utilization ratio of 30% or less. Keeping your ratio below 30% can raise your credit scores.
Other factors, such as your payment history, your mix of accounts and the average age of your accounts, also influence your credit scores. If those factors affect your scores positively, a credit utilization ratio above 30% won’t necessarily cause your scores to drop.
Why Should You Aim for a Low Credit Utilization Ratio?
Your credit utilization ratio reflects how well you manage your available credit. Consumers with lower credit utilization ratios are less risky in the eyes of credit card issuers and lenders. Therefore, they typically have higher credit scores and get offered credit cards and loans with better terms than people with higher utilization ratios and lower credit scores.
Having a significant percentage of your total credit available can help you deal with a financial setback. If you face an unexpected bill for medical treatment or car repairs, or if you lose your job, you will be able to use some of your available credit to get by. Just be careful not to use more than necessary and work to pay down your balances as soon as possible to avoid a drop in your credit scores.
How Can You Lower Your Credit Utilization Ratio?
If your credit utilization ratio is currently higher than you’d like it to be, there are two ways to bring it down: reduce your credit card balances and increase your total credit limits. Putting more money toward your credit card bills each month can help you lower your balances. If you’re struggling to pay off your credit cards because of high interest rates, consider transferring a balance to get a lower rate. You may even qualify for a balance transfer with no interest.
Another option is to increase your total available credit. If you’ve had an account open for a while and you’ve consistently made your payments on time, you can contact the company and request a credit line increase. Credit card issuers also review customers’ accounts periodically. A creditor may increase your credit limit without you having to ask.
