What is a Credit Utilization Ratio?

Think of the Credit Utilization Ratio as a measure of how much of your total available credit you’re using.

Your Credit Utilization Ratio is calculated by dividing the amount you’ve charged by your total credit limit.

For Example:
Imagine you have a credit card with a limit of $1000. This is like your financial “tank” that you can fill up with charges. Now, let’s say you’ve charged $500 to your credit card.

Again, your Credit Utilization Ratio is calculated by dividing the amount you’ve charged ($500 in this example) by your total credit limit ($1000 in this example). So, in this case, your Credit Utilization Ratio would be 0.5, or 50% when expressed as a percentage.

What is considered a good Credit Utilization Ratio?
Much like a debt to income ratio, below one third or 35% Credit Utilization is considered good. Once you go above 50% the credit bureaus believe you are overextending yourself. A high Credit Utilization Ratio (CUR) can lower your credit score and a low CUR can help it increase.

!*$*$* Important! *$*$*!

Your Credit Utilization Ratio is a far more important number for your credit report than most people understand.

Stop here and learn about different types of credit in your credit report.

The Credit Utilization Ratio of your revolving credit accounts is typically a huge factor in calculating your credit score.

Once your Credit Utilization Ratio on any given revolving account goes above 50%, the credit bureaus think you are starting to be over extended in your credit and every month your ratio is above 50% IT LOWERS your credit score even if you pay your bills on time.

If any of your cards have reached or gone past their respective credit limits it can lower your score dramatically, even if you pay everything on time and are super responsible about it.

This is one of the many reasons people consider the credit reporting system unfair. You are paying the debt as agreed but they came up with a slick way to justify charging you more money.

It also gets worse. Some credit cards will change you to a higher interest rate or lower your credit limit if they see you are over your limit on another card in your credit report. You read that correctly. This is why many people consider the credit card industry a dirty unfair game.

Remember

The system is in place to figure out how to justify charging you as much money as they can squeeze out of you. It helps to pay your bills on time and NOT charge up or borrow more debt than you can pay back quickly so that you can maintain a low CREDIT UTILIZATION RATIO. This will help you reach a high credit score.

A good rule of thumb for revolving credit accounts is to keep your credit utilization ratio below 25%. if you have to charge one up beyond 50% of its available limit do your best to pay it down below that level as soon as possible and always try to make above your minimum payments so your balances go down.