It is generally expressed in percentage form, and you can calculate an overall credit use ratio for each of your credit accounts. This is also known as your per-card ratio.
Credit Utilization Ratio
This is quite important as credit scoring models often consider the credit use rate when calculating a credit score for you. They can also impact up to 30% of your credit score based on the scoring model that is used.
Low credit use ratio implies that you are using less of your available credit. Credit scoring models are an indication that you are doing good in maintaining your credit without overspending. With higher credit scores, it is easier to secure other credit like auto loans, mortgages, and credit cards with favorable terms when needed.
What is a Good Credit Utilization Ratio?
With the FICO Score or score by VantageScore, it is commonly advised to keep your total credit utilization rate below 30%. The utilization ratio is an indicator that you are doing a good job of managing your credit responsibilities since you are far from over-spending.
A higher utilization ratio on the other hand is a sign of potential lenders of creditors that you are having issues with managing your funds.
How Credit Utilization Ratio Impact Borrowers
A borrower’s credit utilization ratio varies over time as borrowers make purchases and payments. The total balance due on a revolving credit account is reported to credit agencies at various times throughout the month.
Some lenders report to credit reporting agencies at the time a statement is issued to the borrower. Others may decide o report on a particular day of each month. This time used by lenders for reporting credit balances to an agency can impact a borrower’s credit utilization level.
As a result, borrowers who seek to decrease their credit utilization must be patient to wait for the result. It may take two to three credit statement cycles for the credit utilization levels to decrease when debt is paid down.
Calculating Credit Utilization
As your credit utilization is a simple ratio, you can easily estimate your own credit utilization by knowing your credit card limits and credit card balances. This information can be gotten when you check your most current credit card statement, as long as you log into your online account.
You can also call the toll-free customer service phone number at the back of your credit card to gain access to a live representative. Also, you can calculate credit utilization by dividing a credit card’s balance by the credit limit. The result will be in decimal, then multiply the number by 100 to get the percentage. And the result is your credit utilization.
How to Lower Your Utilization
You can lessen your high credit operation rate. It will replicate on your credit account and in your credit score, the next time your credit card. There are two ways you can use in reducing your credit operation:
You can lessen your credit utilization rate by lowering your credit card balances. What this means is that you should simply pay as much as you can toward your credit card to reduce your balance as well as your credit utilization speedily.
However, your credit card issuer may not state your balance up until the end of your billing cycle. Thus, you are to leave your balance small pending till then to guarantee that it pops up on your credit report.
You can lower your credit utilization by having your credit card issuer increase your credit limit. Keep in mind that this may not be easy as it depends on your income, credit history, and how much time has elapsed since your last credit limit increase.