When it comes to your credit score, the higher the better. But that’s not the case for your credit utilization ratio. While you shouldn’t shoot for zero, the ideal number is 10 percent, though you’re likely in pretty good shape as long as it doesn’t exceed 30 percent.
An analysis by state shows that the 10 states with the highest average credit utilization ratios fall within the recommended range. However, it’s important to keep in mind these are averages of all credit holders in each state. In other words, if the average credit utilization ratio of Alaska residents is 27.73 percent, for example, that means a considerable number of people are well over the recommended 30 percent cap.
Is your state on the list?
- Alaska, 27.73 percent average utilization
- Mississippi, 23.11 percent average utilization
- Georgia, 22.93 percent average utilization
- Alabama, 22.49 percent average utilization
- Nevada, 22.16 percent average utilization
- Arkansas, 22.02 percent average utilization
- Oklahoma, 21.83 percent average utilization
- South Carolina, 21.82 percent average utilization
- Texas, 21.59 percent average utilization
- Louisiana, 21.55 percent average utilization
What is a credit utilization ratio?
Your credit utilization ratio is the percentage used of your available credit.
How do I calculate my credit utilization ratio?
Add up the total balance of all your credit accounts. Then add up the total limit of all your credit accounts. Finally, divide your total credit balance by your total credit limit. This will give you your credit utilization ratio.
What is the recommended ratio?
The recommended credit utilization ratio is 10 to 30 percent. This is recommended, as consumers with the lowest utilization ratios tend to have the highest credit scores.
If a low credit utilization ratio is ideal, why is zero percent to be avoided?
A credit utilization ratio as low as zero percent means the consumer is not using their credit at all. And this means they are not demonstrating any ability to successfully manage credit. As a result, a zero percent utilization carries a negative impact in the algorithms used to calculate credit scores. So the higher your credit utilization ratio, the lower your credit score.
How does my credit limit affect my ratio?
It’s estimated that your credit utilization ratio makes up 30 percent of your credit score.
If I have a high credit balance does that mean I have a high credit utilization ratio?
Not necessarily. While a balance of $10,000 may sound high, for example, it would fall well within the ideal credit utilization ratio if the credit limit is $100,000.
If I have a low credit limit does that mean I have a low credit utilization ratio?
Again, not necessarily. In fact, the lower your limit, the harder it may be to maintain a low utilization. For instance, if your credit limit is just $1,000, that means you never want to charge more than a $100 to $300.
How can I improve my ratio?
You can improve your credit utilization ratio by paying down the balances of your credit accounts. As you do so, periodically calculate how your credit utilization ratio improves, using the formula outlined above. If you only have one credit card, one easy way to increase your utilization ratio is to apply for another, thus increasing your overall credit limit. However, you should only do so if you already have a good handle on keeping your credit card use in check. If you think you’ll be tempted to charge up more debt than you can pay off on a monthly basis, you’re better off with a limited number of credit accounts.