What is a credit utilization ratio?

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What is a
credit utilization ratio?

  • Thirty percent of your credit score is based on your credit utilization ratio, also called a balance-to-limit ratio.
  • The ratio is created by dividing what you owe by the sum of the credit limits on all your lines of credit.

Example:
cards A and B

Let’s say you have two credit cards.

Card A has a credit limit of $1,500 and you are carrying a balance of $500.

Card B has a credit limit of $5,000 and you are carrying a balance of $1,500.

  • Total balances = $2,000 ($500 + $1,500)
  • Total credit limits = $6,500 ($1,500 + $5,000)
  • Credit utilization ratio = 30 percent ($2,000 divided by $6,500)

Low ratio,
better score

In the example above, your credit utilization score is 30 percent. The lower your credit utilization ratio, the better it is for your overall credit score.

An ideal utilization ratio is 0 percent, but finance experts recommend maintaining a ratio of no higher than 30 percent. A ratio of 30 percent or lower will have minimal impact on your credit score. Be aware: If a healthy credit score is your goal, you’ll want to maintain a 30 percent credit utilization ratio on each individual credit card, as well as on your overall debt.


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