Understanding Credit Card Utilisation Ratio and How it Affects Your Credit Score

Your credit utilization ratio is one of the most vital aspects of calculating your credit score. It actually forms 30% of your credit score, according to Investopedia. Simply put, your credit utilization ratio represents the amount of credit balance you have, compared to your loan limit. That means the ratio has a major role to play in determining whether or not you can get credit from lenders. The higher the ratio is, the lower your credit score. A high credit card utilization ratio means that you are making a lot of your purchases on credit and fewer purchases with cash. As a result, the chance of you defaulting on a loan payment might be considered high. Lenders might be less willing to offer you credit under a high utilization ratio, and those who do offer you loans will do so at a high interest rate. Ideally, you should aim to maintain a low ratio.

Here’s what you need to know about your credit utilization ratio:

What Is The Best Ratio?

The best credit card utilization ratio is 0%. This simply means that you are not utilizing your credit cards at all. However, the chances of recording a zero balance while using your credit cards are quite slim, unless you pay up all your credit balances on time. Ideally, a 30% credit utilization ratio is considered a good ratio. Such a balance means that you are using less than 30% of your credit card limit which can give you a suitable credit score range. For example, you can use $300 for every credit card with a limit of $1000. In case the ratio goes beyond this mark, it can have a negative effect on your credit score.

Calculating the Ratio

All you need to calculate your credit card utilization ratio is your credit limit and your credit balances, both of which you can obtain from your most recent credit card statements. Divide your credit balance by your credit limit and multiply the answer by 100 to get your credit utilization ratio. In some cases, your credit card balances might differ from that in your online credit card account. This is because you might have paid up some credit or even used some more of it before your credit card report was updated.

Steps for Lowering the Ratio

Your credit card utilization ratio will typically change with the changes in your credit balances and the credit limit, while affecting your credit score as well. There are two main ways to lower the ratios. First, lower your credit card balances. Aim at using less of the credit cards and more cash when making purchases. Additionally, paying off your balances will do the trick. The second option would be to ask for an increase in your credit limit. Although this is not easy as it will depend on your income, the last credit limit increments and your credit history, it is still possible to have your loan limit increased.

Your credit score depends on numerous factors, with your credit utilization ratio playing a major role in determining it. The lower you can maintain the ratio, the easier it will be to get approved for more credit. Work on reducing this ratio for easier loan application.