Trying to improve your credit score?
That magic three-digit number plays a critical role in determining the terms youll be offered.
Your credit utilization ratio is one metric that significantly impacts your credit score.
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What Is a Credit Utilization Ratio?
Also called your credit utilization rate, your credit utilization ratio is the amount of available credit youve used.
Your available credit is the maximum amount of revolving credit you’ve got the option to use.
In other words, your available credit is your credit limit minus your balance.
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So say youve charged $3,000 to your credit card, which has a limit of $7,000.
Your remaining credit is $4,000.
Then multiply it by 100 (to make it a percentage).
Using the above example, your credit utilization rate would be nearly 43%.
Why Is Your Credit Utilization Ratio Important?
Your credit utilization ratio is important because its a large determining factor when it comes to your credit score.
Did you know?
A lower credit score indicates a higher risk.
That means you might only qualify for a loan with a high interest rate or not qualify at all.
Heres a quick review of what goes into determining your FICO score.
Missing payments or maxing out your credit cards each month indicates risk to lenders.
Will you actually be able to make your monthly mortgage payments on time if youre racking up debt?
Experts recommend keeping your credit utilization ratio below 30%.
As a general rule of thumb, a low credit utilization rate means a higher credit score.
A high rate means a lower credit score.
You shouldnt attempt to reach 30%, he says.
The lower, the better.
Above that, your scores start to suffer.
Ultimately, lower credit utilization rates are better.
In fact, when asked what the ideal credit utilization rate is, Griffin responded simply: Zero percent.
Or at least dont charge as much to your credit card.
Then, youre using less of your available credit.
Another option is to spread your purchases across multiple credit cards.
However, this can get a bit tricky.
Credit card companies typically report your credit usage to the credit bureaus at the end of your billing cycle.
But some will report it at the end of each month or not at all.
Youll want to contact your card issuer and ask.
As long as you dont have an exorbitant amount of debt, it typically wont be an issue.
The idea is to give yourself additional credit but to keep your spending the same and not use it.
And remember, just because you have more room to spend money doesnt mean you should.
Rachel Christian is a senior staff writer at The Penny Hoarder.
Carson Kohler, a former staff writer, contributed.
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