Credit card utilization ratio is the amount of credit a borrower uses compared to the total amount of credit available to them. It is an important factor in determining a borrower’s creditworthiness and can impact their credit score. Here is a closer look at credit card utilization ratio and why it’s important:

What is credit card utilization ratio?

Credit card utilization ratio is calculated by dividing the amount of credit a borrower has used by the total amount of credit available to them. For example, if a borrower has a credit card with a $5,000 credit limit and has used $2,000 of that credit, their utilization ratio would be 40%.

Why is ratio important?

Credit card utilization ratio is an important factor in determining a borrower’s creditworthiness. A high utilization ratio can indicate that a borrower is relying heavily on credit, which can be seen as a red flag by lenders. A low utilization ratio, on the other hand, indicates that a borrower is using credit responsibly and can be seen as a positive factor by lenders.

How does impact credit score?

Credit card utilization ratio is one of the factors that make up a borrower’s credit score. A high utilization ratio can have a negative impact on a borrower’s credit score, while a low utilization ratio can have a positive impact. It is generally recommended that borrowers keep their utilization ratio below 30% to maintain a good credit score.

How can borrowers manage their credit card utilization ratio?

Borrowers can manage their credit card utilization ratio by monitoring their credit card balances and limiting their credit card spending. They can also request a credit limit increase from their credit card issuer to increase their available credit, which can lower their utilization ratio. However, it is important to use the additional credit responsibly and not increase spending to avoid further debt.

How often should borrowers check their ratio?

Borrowers should check their credit card utilization ratio regularly, at least once a month, to ensure that they are using credit responsibly and not overspending. Checking credit card utilization ratio can also help identify potential errors on credit reports and take necessary steps to correct them.

In summary, credit utilization ratio is an important factor in determining a borrower’s creditworthiness and can impact their credit score. Borrowers should aim to keep their utilization ratio below 30% and monitor their credit card balances regularly to manage their credit card utilization ratio effectively. By using credit responsibly, borrowers can maintain a good credit score and improve their chances of getting approved for credit in the future.