The ins and outs of credit utilization ratio
One of the biggest factors impacting your credit score is the credit utilization ratio. This is your total credit used divided by the total credit available to you. Your best strategy when dealing with this ratio is to keep it below 30 percent. If it goes above that number, you could be in trouble.
Your credit utilization ratio is made up of revolving credit — so any lines of credit and credit cards. It does not include loans, like a mortgage or student loan debt. If you have three credit cards with a total of $32,000 credit available, and you have a $5,000 balance on one of the cards, your ratio is 20.83 percent. That’s pretty good. A low ratio indicates to lenders and credit bureaus that you are handling your credit wisely, and not overspending. It’s essential that you keep this percentage low. Here’s what TransUnion, VantageScore 3.0 considers when coming up with that magical three-digit number:
- Payment history (40%)
- Amounts owed (23%)
- Length of credit history (21%)
- Credit mix (11%)
- New credit (5%)
“Amounts Owed” is where your ratio comes into play. Keep your credit utilization ratio below 30 percent and your credit score will be higher.
If your ratio goes above 30 or even 50 percent, your credit score could go down by double digit points. When your score goes down by that much, you’ll find it harder to secure loans, you’ll get higher interest rate offers on credit cards and much more.
Keep your credit utilization ratio in mind to maintain healthy finances. Try to make sure you can pay off your credit cards in full each month. If you have a heavy spending month that you know you will blow your ratio, consider paying your bill mid-month to bring it down. Keep cards open that you don’t use (if they don’t have an annual fee) anymore. You can even ask for a credit limit increase on your cards. Keep your ratio low and your finances will be easier to handle.
Article by Savvy Money