Just like it’s important to know your weight, blood pressure, cholesterol, resting heart rate, etc. for your overall health, it’s important to know a few numbers regarding your financial health. You may know your credit score, but do you know your credit utilization ratio? Not only is it good to know this for your overall financial wellbeing and seeing how close you are to your credit limits, but this number is factored in the credit score formula—meaning, if you want to raise your score, you need to have a good credit utilization ratio.
To determine your credit utilization ratio, you need to know your:
- Total lines of credit
- Your current balances.
Note that this is only regarding your revolving credit (credit cards, personal loans, and home equity lines of credit) and not installment loans such as student loans and car loans.
Formula: (Total Outstanding Balances / Total Credit Limit) x100 = Credit Utilization Ratio
Example: Credit Card A has a credit limit of $5000 and has a balance of $2000. Credit Card B has a limit of $3000 and a balance of $1000. 3000/8000 X100 = 37.5%
You can also do this on the individual cards, in addition to your overall usage:
Card A: 2000/5000 X 100 = 40%
Card B: 1000/3000 x 100 = 33.3%
Why is this important?
Aside from this being factored into your credit score, this number will let lenders know how well you manage debt and is used to determine your creditworthiness. Ideally, your credit utilization ratio should not exceed 30%. If yours is higher than 30%, lenders will see this as a red flag that you are borrowing more than you can handle and you may have trouble repaying your current debts. If you will be applying for a car loan or mortgage in the near future, it’s important to first get your credit utilization ratio down if it’s too high. This will improve your credit score and give you better opportunities for affordable interest rates.
Because your credit card balances are likely changing each month, it’s important to calculate this number on a regular basis.
Keeping your balances low and paying your credit cards in full will ensure a healthy utilization ratio. If you need help with this, contact your Extension office to connect with a Family and Consumer Sciences Agent who can assist.
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