A credit utilization ratio helps lenders determine whether or not it’s safe for them to give you a loan. They need to know this because if they approve an application and the borrower uses up all of their available line of credit, they will have money left to make payments. This can lead to serious financial difficulties, like being sued by creditors or even going bankrupt. So it’s in everyone’s best interest that lenders consider this factor when considering your application.
What does the term credit utilization ratio mean?
The credit card utilization ratio is the percentage of your available credit that you are using at any given time. The higher this number, the more likely you will have a higher debt-to-income ratio and be considered a high-risk borrower by lenders.
Credit utilization ratios determine your credit score and other factors, such as interest rates and loan amounts, when applying for loans online or through a local bank branch. Credit scores range from 300 to 850; good scores range from 720–850, while bad ones are below 650.
What does your credit utilization ratio do?
The credit utilization ratio is a measure of your overall debt load. It’s the amount of credit you use compared to the amount of available credit that you have. The lower your percentage, the better for your credit score. In other words, if you have $10,000 in available credit and only use $2,500 on your two cards, then your ratio would be 25%. If it were 80%, that number would be far higher–and could negatively affect your score.
SoFi “The general rule is that you should not exceed a 30% credit card utilization rate. In our example, you would not want to use more than $6,000 of your available $20,000 credit.”
What is a high credit utilization ratio?
A high credit utilization ratio is when the balance on your credit cards is large. It’s also known as your balance-to-limit ratio and can impact your credit score. This means that if you don’t pay off the full balance of each card every month, or at least make a good-faith attempt at doing so (more on this later), then you’re going to have a hard time getting approved for any new loans or lines of credit until you do.
How can I improve my credit utilization ratio?
Paying off your debt is the easiest way to improve your credit utilization ratio. If you’re in debt and have been making payments on time, but have still accumulated a large balance, keep up the good work! The next time you get paid, put some extra money toward the highest interest rate loans first (since those cost you more). Paying down those debts will help lower your total debt and may eventually increase your credit score.
You must keep an eye on your credit score if you have a high credit utilization ratio. If you don’t, it can affect your ability to get approved for loans and other types of credit. Lenders and other creditors may also require you to pay off some debts before applying again for new lines of credit.