how much credit you are using out of your total credit. You can make a better credit score by maintaining a low credit utilization ratio or CUR. The experts suggest keeping your credit card utilization below 30%. This shows the lender that you can use credit responsibly and not completely rely on it.
Let us look more closely at what is credit utilization ratio and how it matters!
What is the Credit Utilization Ratio?
A credit utilization ratio or credit utilization rate is the credit you use out of the total credit you have. Denoted in percentage, it is the second most important determinant in credit score calculation after repayment history. Having a lower utilization rate can increase your credit score and bring you many financial benefits.
The credit utilization calculation depends on the credit card limit. You will have a lower utilization rate if you have a higher credit limit.
How to Calculate Credit Utilization Ratio?
You can calculate your utilization rate easily. Here is how to calculate credit utilization:
- Find your credit card balance and credit limit. You can get this information from your credit card issuer or credit report. We suggest you retrieve the details from the credit report, as the credit scoring models rely on that data.
- Put all your credit card balances together.
- Combine your credit limits.
- Now, divide the result by the total credit limit you have.
- Now, calculate the percentage by multiplying the result by hundred.
For example, you are using two credit cards. The first credit card balance of Rs. 4,000, and another card has a balance of Rs. 6,000. The credit limit for both your cards is Rs. 10,000. So, your total available balance is Rs. 10,000, and your credit is Rs. 20,000. This puts your credit utilization rate at 50%.
Wasn’t it easy? It needs you to simply add, divide, and multiply!
Similarly, if you want to calculate the credit utilization for one account, you can use the same calculation for one card. In the above example, the first card has a utilization of 40%, and the other card has a 60% utilization.
How is Credit Utilization Important for Credit Score?
There is a direct impact of utilization rate on the credit score. If you have more utilization, it can hurt your credit scores. If your utilization rate is less, it can help build a good credit score.
When you use your credit card to make most of the purchases and of bigger amounts, you will have a high credit utilization ratio. If you have a bad credit score and want to reduce credit utilization, consider using cash or debit cards to make most payments. This will lower your credit usage substantially. However, there is another option to it, too. You can maintain a low balance when you pay off your balance earlier than the due date. This will show your credit usage is low and prevent harming your scores.
Some credit scoring models track your balance and payments. If you have maintained good credit repayment in the past and have been paying the amount in full without growing your balance, your credit score will keep improving.
Wrapping Up
Credit card utilization ratio is a vital parameter that can positively or negatively impact your credit score. You should maintain credit utilization ratio to build credit. When you have a less credit card utilization ratio, you will have a great credit health. This will help you enjoy several financial advantages. You can maintain a low credit utilization rate by optimizing your credit card usage, increasing your credit limit, and lowering your credit balance.
A lower utilization is best for your credit score. Need more expert advice to maintain superior credit health? Due Factory can help you in this regard!
FAQs
1. What is a good credit utilization ratio?
Ans. You should have a low utilization rate. To believe the specialists, you should not exceed credit utilization of 30% to have a great credit score. Also, a utilization rate of 0% is not good, as the credit bureaus need some usage to calculate your score. A 0% utilization implies means that you have not been using credit.
2. Is credit utilization crucial for credit score?
Ans. The credit utilization rate is considered when credit scoring is done. A low credit utilization leads to an improved credit score, and vice versa.
3. How can I ensure having a low credit utilization ratio?
Ans. You should consider keeping your credit use low. This will lead to low credit balance. If your CUR is too high, you should make purchases using cash or debit cards. You can also lower your utilization ratio by raising your card limit.
4. How does paying the balance early improve my credit utilization?
Ans. The credit card companies report your credit balance to the credit bureaus after sending you the bill due after a few days. This will be recorded as high utilization even if you pay the entire bill on the due date. If you pay early, you can lower the reported balance and utilization rate.
5. Will credit card issuer agree to increase credit limit?
Ans. If you are an old client and have been paying your dues on time, you can ask the company to raise your credit card limit. You can also generate the request when there is a salary hike or credit score improvement.
6. How can I calculate my credit utilization percentage?
Ans. Add your credit card balances and divide the same by the total credit card limits for multiple credit cards to calculate your utilization ratio. Multiply this number by 100 to calculate the credit utilization percentage.