Credit utilization is an important factor in determining your credit score. Learn how to improve your credit score by understanding your credit utilization.
What is Credit Utilization?
Credit Utilization is the amount of credit you are using versus how much credit is available to you. This concept applies to credit cards, loans and line of credit. This ratio contributes to your credit score and is available to you via your credit report.
The Recommended Credit Utilization Ratio
While there’s no magic rule, there are guidelines on what the credit utilization ratio should be. Let’s first learn how you can calculate the ratio.
You take the amount of credit you are using divided by the amount of credit available to you. For example, if you use $1000 each month and have a credit limit of $5000. Your ratio is 20%.
The recommended ratio is keeping your ratio below 35%. This allows lenders to trust that you can manage your money. The low ratio also proves that you are not reliant on credit funds to maintain your lifestyle.
How to Manage Your Credit Utilization Ratio?
Here’s 3 tips of how you can manage your ratio:
- Monitor your credit limits. Calculate your ratio quickly for three consecutive months to determine your average ratio. If the ratio is higher than 35%, increase your credit limit or decrease your credit usage.
- Apply for credit products to increase your credit limit. This will allow you to spend more without compromising the ratio. If you need advice on how to build a better credit score, check out our popular blog post.
- Pay off your balances in full. It is important for your credit score and history that you pay your balances in full. This will help you avoid high interest rates and not waste your available credit limits.
If you are looking to understand more about credit and debt, read our Personal Finance Guide.
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