Explaining the Credit Utilization Ratio and How It's Calculated
Credit utilization ratio is bank-speak for describing the ratio of what is owed on a credit card compared to your available credit line. This ratio is so important that it actually accounts for about 30% of a credit score. In our situation, our credit utilization ratio was high because instead of spreading our debt evenly over several cards, I put everything on the card with the lowest interest rate. While this makes sense in terms of saving on interest, it also throws off the ratio which impacts a credit score.
Calculating the Credit Utilization Ratio
Calculating the ratio is super simple. All that's required is a calculator and a copy of your current credit card statement.
1. Divide the current credit card balance by your limit, also known as the "credit line" .
For example, if you have a $10,000 limit and have $4800 charged on the card, divide 4800 by 10,000 to come up with .48.
2. Multiple this number by 100 to convert the fraction into a percentage.
Using this example .48 becomes 48%. Your credit utilization ratio on this particular credit card is then 48%. This exercise should be repeated on all your credit cards.
What is a good range
The FICO score looks at the credit utilization ratio in two different ways. They will calculate the ratio ~ like you just did ~ on each card to determine an overall score. Next, they'll add up all your credit card balances and divide this number by the total credit line for another score. If either of these numbers is too high, then your credit score is impacted negatively.
When it comes to a good range for a credit utilization ratio, I've seen answers anywhere from 25% to 75% (read creditscoring.com to view what experts are saying.) According to my personal banker at Key Bank, the ideal credit utilization ratio in today's economy is between 30-40%.
More by this author:
How Credit Card Management can Impact a Home refinance.
How to Get a Lower Interest Rate on a Credit Card
Published by C. Jeanne Heida - Featured Contributor in Business & Finance
Jeanne is a small business owner with 25 years experience in the real estate industry. A consistent Y!CN Top 100 writer, her articles can be found at Y!Finance, Shine, Your Wisdom, DEX, and the Scripps Net... View profile
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