What is credit utilization ratio & how they calculate it?

Credit utilization ratio gives an idea to lenders about howmuch you owe in relation to your overallcredit limit from lines of credit. This ratio is then expressed as a percentageto give a concise report to the issuer.

How they calculate credit utilization ratio;

Credit utilization ratio = (Sum of credit cards balances / Sum of all credit cards credit limits) X 100

Utilization ratio is important because it not only showscredit bureaus about the used of credit limit but also gives an idea about your financial situation. Both VantageScoreand FICO consider credit utilization as a significant factor while calculating thecredit score. If striving with yourcredit then you must try and use a secured creditcard to build a credit score.

Too much buying on your cards results in a higher creditrisk specifically when you are using full limits. That’s why you lower yourscore by maximum use of your cards. As a consequence,you will not qualify for lower insurance rates, APR, and even may find itdifficult to get a new cellphone plan.

Types of Credit Utilization Ratio:

Per card Utilization ratio and Overall Utilization ratio aretwo different types mostly people talk about.

Per-card utilization:It helps to evaluate how much of the credit limit of each card you use.

Overall Utilization:It evaluates the usage of credit limit from all cards and their respectivelimits collectively.

Which type of utilization ratio is important?

If we talk about the importanceof credit utilization based on types then both are essential. Credit scoringagencies can consider your profile in both ways for a better picture. Moreover,it always impacts your score so it’sreasonable to use your cards carefully.

Tip: If thinking to inflate the effects of your max out the credit card on your credit score by applying for a new creditcard with a plan tokeep it at 0$ balance. Then it may not work out as the scoring agency will haveaccess to both ratios – per card and overall and can still hurt yourscore.

Some experts suggest that sometimes credit limit increasecan also help to make your scores better. But you must consider your situationbefore and plan things for successful credit limitincrease requests.

The majority of experts also say that you should not usemore than 30% of your credit limit on one card and your utilization ratio willtake care of itself accordingly.

If you would like to suggest any strategy to meek yourcredit utilization don’t forget to share here in the comments section for the publicinterest. Concisely we can say that lesser you use your credit limit the betterit is to keep your credit score healthy.