Credit Utilization Ratio Calculator
A credit utilization ratio calculator is a tool that helps you
measure how much of your available credit you are using. Your
available credit is the total amount of money you can borrow from
your credit cards and other revolving credit lines. Your credit
utilization ratio is the percentage of your available credit used by
making purchases, cash advances, or balance transfers.
A credit utilization ratio calculator can help you determine your credit utilization ratio for all your credit cards combined. It can also help you see how your credit utilization ratio affects your credit score and what you can do to improve it.
Why is Your Credit Utilization Ratio Important?
Your credit utilization ratio is important because it is one of the main factors determining your credit score. Your credit score is a number that reflects your creditworthiness or how likely you are to pay back your debts on time. Your credit score can affect your ability to get approved for loans, credit cards, mortgages, and other financial products. It can also affect the interest rates and fees for borrowing money.
Your credit utilization ratio accounts for about 30% of your FICO credit score, the most widely used credit scoring model in the U.S. The lower your credit utilization ratio, the better for your credit score. This is because a low credit utilization ratio shows that you are not relying too much on your credit cards and have plenty of available credit in emergencies. On the other hand, a high credit utilization ratio shows that you are close to maxing out your credit cards and may have trouble paying back your debts.
How Do You Calculate Your Credit Utilization Ratio?
To calculate your credit utilization ratio, you need to know two things: your total credit balance and your total credit limit. Your credit balance is the money you owe on your credit cards and other revolving credit lines. Your full credit limit is the maximum amount of money you can borrow from your credit cards and other revolving credit lines.
You can find your total credit balance by looking at your credit card statements, logging into your online accounts, or calling your credit card issuers. You can also get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year at AnnualCreditReport.com. Your credit report will show your credit balances and limits for each credit account.
Once you have your total credit balance and your total credit limit, you can use this simple formula to calculate your credit utilization ratio:
Credit utilization ratio = (total credit balance) / (total credit limit) x 100%
For example, if you have three credit cards with the following balances and limits:
- Card 1: Balance = $500, Limit = $2,000
- Card 2: Balance = $300, Limit = $1,000
- Card 3: Balance = $200, Limit = $500
Your total credit balance is $500 + $300 + $200 = $1,000. Your total credit limit is $2,000 + $1,000 + $500 = $3,500. Your credit utilization ratio is ($1,000 x $3,500) x 100% = 28.57%.
You can also calculate your credit utilization ratio for each credit card individually using the same formula. For example, your credit utilization ratio for Card 1 is ($500/$2,000) x 100% = 25%.
What is a Good Credit Utilization Ratio?
There is no definitive answer to a good credit utilization ratio, as different lenders may have different standards and preferences. However, a general rule of thumb is to keep your credit utilization ratio below 30%. This is because most credit scoring models penalize credit utilization ratios above 30%, indicating a higher risk of default or delinquency.
However, lower is not always better. A credit utilization ratio of 0% may not be ideal either, as it may suggest that you are not using your credit at all or that you get off your balances too quickly. This may make it harder for lenders to assess your credit behavior and history. A credit utilization ratio of 0% may also lower your credit score if you have a short or thin credit history, as it may reduce the average age of your accounts and the number of accounts with activity.
Therefore, a good credit utilization ratio may vary depending on your credit profile and goals. Some experts suggest that a credit utilization ratio of 10% to 20% may be optimal for most people, as it shows a healthy balance between credit usage and availability. However, depending on your specific situation and needs, you may need to adjust your credit utilization ratio.
How to Improve Your Credit Utilization Ratio
If your credit utilization ratio is too high, there are some steps that you can take to lower it and improve your credit score. Here are some tips to improve your credit utilization ratio:
- Pay off your credit card balances in full every month. This is the best way to avoid paying interest and fees and keep your credit utilization ratio low. If you cannot pay off your balances in full, try to pay more than the minimum amount due and pay as early as possible in the billing cycle.
- Request a credit limit increase from your credit card issuers. This can increase your total credit limit and lower your credit utilization ratio if you do not increase your spending. However, be aware that some issuers may perform a hard inquiry on your credit report when you request a credit limit increase, which can temporarily lower your credit score. Therefore, you may ask your issuer if they will make a hard or soft inquiry before you apply.
- Open a new credit card account. This can also increase your total credit limit and lower your credit utilization ratio if you use the new card to rack up more debt. However, opening a new credit card account can also lower your credit score in the short term, as it will reduce the average age of your accounts and add a hard inquiry to your credit report. Therefore, you may want to avoid opening a new credit card account if you plan to apply for a significant loan or mortgage soon.
- Transfer your balances to a lower-interest or 0% APR credit card. This can help you save money on interest and pay off your debt faster, lowering your credit utilization ratio over time. However, it would be best if you were careful about the fees and terms of the balance transfer offer, as some cards may charge a balance transfer fee or a higher interest rate after the introductory period ends. You should also avoid using the old or new cards to make further purchases, as this can increase your credit utilization ratio again.
- Consolidate your debt with a personal loan.
This can help you simplify your payments and lower your interest
rate, which can help you pay off your debt faster and reduce
your credit utilization ratio over time. However, you should
know that a personal loan is not a revolving credit line but an
installment loan.
This means that it will not affect your credit utilization ratio directly; your credit mix and debt-to-income ratio are also factors in your credit score. You should also avoid using your credit cards to make new purchases, as this can increase your credit utilization ratio again.
What Credit Accounts Are Included in the Credit Utilization Ratio Calculation?
The credit accounts included in the Credit Utilization Ratio calculation typically involve revolving credit accounts, such as credit cards and lines of credit. These accounts have a set credit limit, and the balance on these accounts at a given time is considered in the calculation.
Installment loans, such as auto loans or mortgages, may not be included in the traditional Credit Utilization Ratio calculation because they have fixed monthly payments and do not have a revolving credit structure.
Key Takeaway
A credit utilization ratio calculator is a valuable tool that can
help you monitor and improve your credit utilization ratio, which is
a critical factor in your credit score. A credit utilization ratio
calculator can help you find out how much of your available credit
you are using, how your credit utilization ratio affects your credit
score, and how you can lower your credit utilization ratio and boost
your credit score.
By keeping your credit utilization ratio below
30%, or ideally between 10% and 20%, you can show lenders that you
are a responsible and reliable borrower, which can help you qualify
for better credit products and terms.
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