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Credit Utilization Ratio: 7 Things Good to Know

March 3rd, 2016 · No Comments · Credit Scores

by Kristy Welsh

(Last Updated On: February 1, 2018)

Credit Utilization Ratio: 7 Things Good to Know

It may not be a term you really want to learn more about — credit utilization ratio — but it’s a big part of what determines your credit score. So it’s worth taking a couple of minutes to make sure you know the basics, especially if you are trying to make bad credit better.

1) Your credit utilization ratio is how much you owe compared to how much credit you have available to you. So, for instance, if you have a $1,000 credit card limit with a $300 balance, your credit utilization ratio for that line of credit is 30 percent.

2) The 30 percent credit utilization rule is a general guideline. That’s what most people will tell you to aim for, myself included. A little more or a little less probably won’t make that much of a difference. The point is, you want to keep your credit utilization ratio as low as possible.

3) There’s another 30 percent number that matters. How much you owe determines 30 percent of your credit score. So the lower your credit utilization ratio, the better.

4) You do not need to carry a balance to earn good credit. In fact, you want to pay off your balances as soon as possible so as to avoid interest rates. Plus, you’ll achieve a low credit utilization ratio in the process. Use your credit. Pay it off. Repeat.

5) Credit utilization ratio applies to individual credit accounts, as well as your overall credit, and both of them matter. This means that, ideally, you don’t want to use more than 30 percent of your available credit across all of your credit accounts.

6) Think twice before closing a credit card. You may never use it, but that zero balance contributes to your overall credit utilization ratio. On the other hand, if you’ve just paid off a maxed-out card that you used all the time and you’re afraid of maxing it out again, closing it out might be your best. Your credit utilization ratio won’t get the benefit of the zero balance, but that’s preferable to maxing out the card again.

Want to know just how much closing that card will affect your credit utilization ratio? Here’s how to do that math and close the card right, if you are so inclined.

7) If you charge something to a credit card that puts you over the 30 percent ratio, make a payment on it right away. It doesn’t have to be the full amount of what you charged – just something to start bringing the credit utilization ratio back down right away. Then make another payment or two in that same billing cycle, aiming to return it to a zero balance, or as close as you can get.

Get more tips on building good credit.