Definition
Credit utilization ratio is the percentage of your available credit that you're currently using, calculated by dividing your total credit card balances by your total credit limits. For example, if you have $2,000 in credit card debt across cards with a combined limit of $10,000, your utilization ratio is 20%. This ratio is a key factor in credit scoring models, accounting for about 30% of your FICO score. Lower utilization rates (generally below 30%) are better for your credit score because they indicate you're not dependent on credit and are more likely to manage debt responsibly. Both overall utilization and per-card utilization affect your credit score.
Frequently Asked Questions
What is an ideal credit utilization ratio?
Financial experts generally recommend keeping your credit utilization ratio below 30%. However, people with the highest credit scores typically maintain ratios below 10%. The lower your utilization, the better for your credit score.
Does credit utilization affect my score immediately?
Yes, credit utilization affects your score as soon as your card issuer reports your balance to the credit bureaus, which usually happens monthly. This means your utilization and score can change frequently, even if you always pay on time.
How can I lower my credit utilization ratio?
You can lower your ratio by: 1) Paying down existing credit card balances; 2) Requesting credit limit increases; 3) Opening new credit accounts (though this may temporarily lower your score due to inquiries); 4) Keeping old accounts open, even if unused; and 5) Making multiple payments throughout the month to keep balances low.
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