What is a credit utilization ratio?
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.
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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)
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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