Do you know the definition of credit utilization ratio? It is a measure that tells us how much of our total available balance we are using in relation to our credit limit. In other words, it's a way to see if your credit card balances are getting out of hand and endangering your ability to pay off your debts. If this sounds like something you're struggling with, consider these helpful tips for successfully managing your credit utilization rate.
Credit utilization ratio is one of many factors banks use when determining whether or not they'll grant an applicant additional lines of credit. Knowing the basics about what this number means and how it affects your credit score can help you take steps towards improving both aspects!
What is credit utilization rate and how is it calculated?
The credit utilization ratio is the ratio of a person's debt to their total credit limit. It can be expressed as a percentage or in terms of balance owed per $1,000 limit on an account. For example, if your current balance on your card is $5,000 and you have a $10,000 credit line available then you are using 50% of your available credit. If you owe more than 33% of what's available to you then that means that the lender considers you over-leveraged and may charge interest at higher rates for borrowing money from them or approve lending requests less often.
Why does your credit utilization rate matter?
At a glance, your credit utilization rate may not seem like it matters. But don't be fooled- the higher your ratio is, the more likely you are to end up with a lower credit score and have difficulty qualifying for loans in the future. Here's why: Credit bureaus measure how much of their total available credit you use on a regular basis and assign this percentage as an "utilization rate" to determine your creditworthiness. The ideal amount varies by type of creditor (credit card issuer or mortgage lender), but is generally 30% or less - anything higher could put you at risk for decreased access to affordable loan options in the future.
For credit repair assistance and financial advice, contact Credit Repair Ease today for a free consultation!
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