Keeping a low credit utilization will help you improve your credit score, but what does that even mean? We explain below:
What is credit utilization?
First, it is important to know that this is one of the two most important factors of your credit score. Credit utilization is the amount you owe from your total credit.
How does your credit work?
This calculation is shown as a percentage and it is important to know that the credit utilization ratio is affected by your balance, your credit limit and the opening or closing of your accounts. It is also highly recommended to keep this ratio below 30% utilization in order to achieve a higher credit score. Otherwise, if your ratio is over this 30% mark, you will start negatively hurting your credit score.
Now, how do you calculate your own credit utilization ratio? You have to add the balance of all your credits and divide them by the total of your credits.
Let’s put this in practice
Still have doubts? Let’s see an example:
Credit A → Balance: $100 Credit limit: $700
Credit B → Balance: $150 Credit limit: $300
Credit C → Balance: $200 Credit limit: $800
Credit D → Balance: $120 Credit limit: $750
- First you add all the balances
Total Balance = ($100 + $150 + $200 + $120) = $570
- Then you add all the credit limits
Total Credit Limit = ($700 + $300 + $800 + $750) = $2,550
- The final step is to divide the Total Balance by the Total Credit Limit and multiply by 100
Credit Utilization Ratio = ($570 / $2,550) * 100 = 22.35%
It is important to keep track of your credit utilization to achieve a higher credit score. With a higher credit score, you can get better rates for insurance, qualify for lower credit card interest, have more housing options, and much more. Share this article with your friends and family to help spread the knowledge.