A lot goes into managing one’s credit. First, consumers must know what the term “credit utilization ratio” means. Second, they must know how their credit card use affects this ratio, and third, they must know how to calculate their credit card utilization rates.
What Is a Credit Utilization Ratio?
The credit utilization ratio is the ratio of the total amount of credit that a consumer has available to him and the total amount of debt that the consumer is carrying. The credit bureaus express this number as a percentage. For example, a consumer with a 25% credit utilization ratio is currently using 25% of the credit that he has available to him. So, if a consumer has a $10,000 limit on a credit card and a 25% credit utilization ratio, this means that the consumer has used $2,500 of his credit limit.
A consumer’s credit utilization ratio can encompass several things, such as the following:
- The amount of debt on all of the consumer’s credit cards
- Mortgage loans
- Student loans
- Car loans
What Is a Good Credit Utilization Ratio?
A good credit it means that a consumer is using a very small amount of the credit available to him. To avoid damage to their credit reports and scores, the wisest consumers only use 30% of their available credit. For example, if a consumer has a $20,000 limit on a credit card, she must only use $6,000.
Sometimes, people cannot avoid making large purchases on their credit cards. They can keep their credit scores from taking a hit at these times by paying the debt down as quickly as possible.
How Does the Credit Utilization Ratio Affect a Consumer’s Credit Scores?
A consumer’s payment history is 35% of the consumer’s FICO score, but the credit it is second at 30%. Therefore, if consumers want their credit scores to be excellent, they must make sure to keep their credit ratios low.
As the experts at SoFi state, consumers “should not exceed a 30% credit card utilization rate”. If consumers need more than that, they must be prepared to pay those charges in full and not allow the balance to linger.
How Can You Lower Your Credit Utilization Ratio?
It’s a great idea for people to lower their credit utilization ratios because this will have the effect of increasing consumers’ credit scores and making them better credit risks. They can do so just by doing the following:
By paying all of the outstanding balances down to 0, the consumer’s debt goes down, and so does the credit utilization ratio. It also benefits the consumer because creditors were adding interest charges to the balances, so the consumer would be reducing the amount of interest that she is paying every month.
It cannot be denied that the credit utilization ratio is highly important for consumer credit reports. This is the reason that they must make sure that they keep these percentages low, and their lower ratios will benefit them in several ways as they go through their financial lives.