Credit Utilization Ratio 101

Your credit utilization ratio or rate can make up as much as 30% of your overall FICO credit score. This is why it’s important to keep it at a manageable level. Contrary to what many might think, credit utilization is a relatively simple concept.

What is credit utilization?

It’s basically a measure of how much you’ve borrowed versus your credit limit. If the overall credit limit of all your cards add up to $2,000 and your overall balance is $200, then your credit utilization ratio or rate is 10%. It’s as simple as that. What’s not so simple is keeping this ratio at an ideal level, which is about 10% or less. In general, you want your credit utilization ratio to be as low as possible – but not 0%.

For the sake of your credit history and score, the ideal credit utilization ratio is 1%. Apart from being a measure of how much you’ve borrowed against your overall limit, this ratio is also indicative of your willingness to borrow as well as your ability to pay your loans back. This is why a healthy 1 to 10% credit utilization ratio is what lenders and credit bureaus alike prefer. For many credit card holders, maintaining their ratio and spending within this range can be a challenge. But there are many ways to do this.

How do I keep my credit utilization ratio down?

The easiest way to manage your utilization ratio and keep it down is to always pay off your balances. The higher your balance, the higher the ratio will be. If possible, you should pay off balances at least twice a month. That way, whenever the bureaus check your score, they’re more likely to see a lower ratio. Furthermore, your ratio is not the only thing that benefits from having minimal to zero balances on you cards.

In fact, ensuring that you’re always on time with payments is the single best thing you can do for not just your ratio but your overall score. In a list of common credit mistakes by Waco Tribune-Herald, the site considers missing a payment as not only one of the most common but also most damaging things you can do to your finances. If you let payments slip past the 30 day due date, not only can it knock significant points off your score, it also might prompt credit providers to lower your limit.

One key thing to remember is that your overall credit limit is what your balance is stacked up against when computing your utilization ratio. This is why apart from keeping balances low, you should also work towards either increasing your overall limit or not letting it dip. A guide to credit utilization by Petal Card details how having just one card with an above-average limit can do wonders for your ratio. Obviously, having more cards with higher limits also helps. The guide also states that if you can’t avoid keeping your ratio within the single digits, then you should at least strive to keep it under 30%.

Credit utilization is just one part of the credit equation

Although your utilization ratio weighs heavily on your credit history, it’s not the only factor that determines your credit score. This is why you should never be late with payments, monitor your credit through software like IdentityGuard or IdentityIQ, and strive to maintain healthy spending habits. If you can practice the aforementioned tactics for keeping your credit utilization ratio down, you can stay on the path towards having and maintaining a high credit score.

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Edwin Contreras


Edwin Contreras is the money hacking millennial behind Cash The Checks. He lives a minimalist lifestyle and is always eager to learn and share his methods to save and make money.

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