Your credit utilization ratio is the calculation of the outstanding balances that you have in your revolving credit accounts (credit cards and lines of credit) in comparison to their limits. So, what should your credit utilization ratio be?
The Right Ratio
There is no concrete rule for credit utilization ratios. They are more like guidelines that you should follow if you want to be more financially stable. What works for some might not work for others.
But, if you’re looking for a specific number, financial experts recommend that users strive for a 30% credit utilization ratio or lower. In this case, your balances will be well below the limits, preventing you from accidentally maxing out your accounts.
Does that mean you should strive for 0%? You can pay down your balances to zero but maintaining that total every month will be extremely difficult. It’s not a realistic expectation to set for yourself.
Why Is It Important?
There are two reasons why your credit utilization ratio is important.
The first reason is that credit utilization is one of the factors influencing your credit score — 30% of your credit score is based on how much you owe. In turn, your credit score affects your personal finances. A high score can lead to lower interest rates, insurance rates and safety deposit rates. It can also make it easier for you to get a mortgage, buy a car, rent an apartment or apply for a business loan.
The second reason is that it helps you manage your money better. A large credit utilization ratio means you have balances that are close to the limits. A high debt load can be challenging to bring down, and with interest rates and unplanned expenses, it can creep towards the maximum and put you in a tough spot. You can avoid this by keeping that ratio down.
How Can You Improve Your Ratio?
If you don’t like the ratio that you currently have, you can try these simple methods to lower it.
Pay Down Your Debt
If your balances are too high, you should try your best to bring them down. You can do this by moving savings from your monthly budget into your revolving credit accounts. Adjust variable expenses like groceries, entertainment and clothing so that you can get more savings.
Pay More Than the Minimum
Paying the minimum helps you avoid late fees and penalties, but it doesn’t do very much when it comes to chipping away at the debt load. Try your best to commit more than the minimum every single time.
Have Back-Up Plans
If your credit card is close to the limit and you have an emergency expense to cover, what can you do? You can’t max out your card. When you’re stuck between a rock and a hard place, you can look to another solution, like a separate line of credit. This may increase your repayment responsibility, but it will come with less risk than maxing out the credit that you currently have. You can apply for a line of credit by CBW Bank offered through CreditFresh to deal with emergency expenses when you don’t have other good options available.
Increase Your Limits
Whittling down the debt load isn’t the only way that you can improve your ratio. You can also ask your creditors if you can increase your credit limits so that you have more available credit to work with. This strategy will automatically lower your overall ratio, even if you don’t take down the balance.
Do the math and see what your ratio is. You might be surprised by the results.