Credit Utilization Ratio…What’s That?
February 22, 2022
What factors affect your credit score? 5 things!
Payment history, credit utilization ratio, credit history length, credit mix, and new credit.
Credit Utilization Ratio
Today, we’re focusing on your credit utilization ratio, or amounts owed. That’s a big fancy way of saying, “How much do you owe on your credit cards versus the total limits?” It doesn’t matter if your total credit card limits are $500 or $50,000; what is important is how much of that limit you owe on those cards. If you have all of your cards maxed out and have no available credit, then you are going to LOSE POINTS on your credit score, but pay those balances down, and your score will GO UP!
Example Of Credit Utilization Ratio
Here is an example of how a credit utilization ratio is calculated. Lets say a borrower has three credit cards with different revolving credit limits.
- Card 1: Credit line $2,000, balance $1,000
- Card 2: Credit line $5,000, balance $2,000
- Card 3: Credit line $15,000, balance $4,000
The total revolving credit across all three cards is $2,000 + $5,000 + $15,000 = $22,000. The total credit used is $1,000 + $2,000 + $4,000 = $7,000. Therefore, the credit utilization ratio is $7,000 divided by $22,000, or 31.8%.
Getting Comfortable With Credit Cards
We know that credit cards can be scary, but they are one of the easiest and quickest ways of establishing credit, as long as you do it correctly. When getting a credit card to establish credit, we like to tell people this…make one purchase with your card, for example, a tank of gas. Then wait for your bill to come and pay it off IN FULL, not just the minimum payment. Once you’ve made your payment, you can now use your card to make another purchase, another tank of gas or other small purchase. Wait for the bill to come, and pay it off in full again. Not only are you establishing a good payment history, you are also keeping the credit utilization ratio low and thus maximizing this portion of your credit score.
We’ve seen others gain close to 50 points on their credit score just by being mindful of their credit card balances!
Should I Keep Credit Cards Open…Or Close Them
Keep any credit cards you currently have OPEN. Closing the cards will reduce how much available credit you have, and that could increase your overall credit utilization ratio. It will also reduce the age of your accounts. Both of these could potentially lower your credit score and the goal is to increase it.
Come See Us!
What are you waiting for? Stop by one of our locations and we will be happy to take a look at your credit with you and give you specific ways to maximize your credit score!