It’s critical to comprehend how the Credit Utilization Ratio functions because it’s one of the main factors used to calculate your credit score. In this article we will clear all your questions regarding the Credit Utilization Ratio.
What is Credit Utilization Ratio?
The amount of credit you are currently utilizing divided by the total amount of revolving credit you have available is your credit utilization rate, also known as your credit utilization ratio. To put it another way, it’s your existing debt divided by your credit limit. Typically, it is stated as a percentage. For example, if your credit usage ratio is 30%, that means you are utilizing 30% of the credit that is available to you.
HOW TO CALCULATE
Add up the balances on all of your revolving credit accounts, then divide that number by the sum of your credit limits to determine your overall utilization ratio, multiply the obtained number by 100 to change the ratio into a percentage.
Credit Utilization ratio = Your total credit card balance ÷ Your total available credit
HOW TO IMPROVE YOUR CREDIT UTILIZATION RATIO?
Keeping your credit utilization below 30% is generally recommended by financial experts, especially if you want to keep a high credit score.
Pay off your Credit Card balances:
Pay more than the minimum each month to lower your credit card debt. Try making two or more credit card payments each month. Even minor extra payments can assist keep your utilization ratio stable throughout the billing cycle and can accelerate the debt payback process.
Reduce your expenditures:
Keeping your expenditures in check is the simplest and most obvious strategy to limit your credit usage. Your credit utilization ratio will be lower if you use your credit card less frequently and pay off your bills on time.
Request for a higher credit limit:
Asking for a higher credit limit on one of your cards is another way to lower your credit utilization rate. You can easily lower your credit utilization ratio by raising your credit limit because you’ll have more available credit on your account. However, be cautious not to use your new credit to create additional debt.
Request a new credit card:
Applying for an additional credit card is another option to raise your total credit limit. If you have several credit cards linked to your account, you have access to more credit, which should lower your credit utilization ratio if your overall expenditure stays the same.
Do not close unused credit cards:
Your credit score will drop if you close an old credit card because it shortens the duration of your credit history. It is advisable not to close a credit card if you have several and are not currently using a particular card. Your credit score can be raised by having a credit card limit that isn’t being used, which hence lowers your credit utilization ratio.
Understanding how the Credit Utilization Ratio works are essential since it plays a significant role in calculating your credit score. A great strategy to raise your credit score is to lower your credit utilization ratio.
Additional Reading: Credit Cards vs. Debit Cards: Key Differences