The Dos and Don'ts of Credit Utilization Ratio: Maintaining a Healthy Credit Score

credit repair Feb 24,2023 By: Darrin Singer Jr

Are you struggling to maintain a healthy credit score? One important factor to consider is your credit utilization ratio. This ratio, which measures the amount of credit you're using compared to your available credit, can have a big impact on your credit score. In this article, we'll take a deep dive into the dos and don'ts of credit utilization ratios and provide you with everything you need to know to maintain a healthy ratio. Whether you're new to credit or a seasoned pro, these tips and tricks will help you make the most of your available credit and keep your credit score on track. So, let's dive in!

Understanding Credit Utilization Ratios

Your credit utilization ratio is an important factor in determining your credit score. It measures how much of your available credit you're using, expressed as a percentage. For example, if you have a credit card with a $5,000 credit limit and you've used $2,500 of that limit, your credit utilization ratio is 50%. A lower credit utilization ratio is generally better for your credit score, while a higher ratio can have a negative impact.

How is Credit Utilization Ratio Calculated?

Your credit utilization ratio is calculated by dividing the amount of credit you're using by your total available credit. For example, if you have a credit card with a $10,000 credit limit and you have a balance of $2,000, your credit utilization ratio is 20% (i.e., $2,000 / $10,000).

Ideal Credit Utilization Ratio

Maintaining a good credit utilization ratio is important for keeping your credit score high. Your credit utilization ratio is the amount of credit you use compared to your credit limit, and it accounts for 30% of your FICO credit score. So, it's crucial to keep this ratio as low as possible.

Credit bureaus such as Equifax, Experian, and TransUnion provide detailed information on how credit utilization ratio is calculated and its impact on credit scores. According to Equifax, "keeping your credit card balances low can positively impact your credit score, while high balances can hurt it." Experian states that "if your credit utilization rate is high, lenders may consider you a higher risk borrower, and this could hurt your chances of getting approved for new credit." TransUnion also emphasizes the importance of a low credit utilization ratio, stating that "utilization rate is one of the key factors in calculating credit scores, and generally speaking, a lower rate is better for your score."

To maintain a good credit utilization ratio, you should aim to keep your credit card balances low and pay them off in full each month if possible. If you do need to carry a balance, try to keep it below 30% of your credit limit. For example, if you have a credit limit of $10,000, try to keep your balance below $3,000. You can also request a credit limit increase to help keep your utilization ratio low.

Why is Credit Utilization Ratio Important?

One reason why credit utilization is important is that it can directly affect your credit score. The higher your credit utilization rate, the more it can negatively impact your score. The Consumer Financial Protection Bureau (CFPB) states that credit utilization accounts for 30% of your FICO credit score, one of the most commonly used credit scoring models. So, if you're using a high percentage of your available credit, your credit score can suffer.

Furthermore, high credit utilization can also indicate financial instability to potential lenders. If you're using a large percentage of your available credit, it can suggest that you're relying too heavily on credit and may have trouble paying it back. This can make lenders less likely to extend you credit in the future.

On the other hand, maintaining a low credit utilization rate can have a positive impact on your credit score and make it easier for you to obtain credit in the future. The CFPB recommends keeping your credit utilization rate below 30%, although keeping it lower than 10% is even better.

Credit Utilization Ratio and Available Credit

It's important to note that your available credit, not just your credit card balances, affects your credit utilization ratio. For example, if you have two credit cards with a combined credit limit of $10,000, and you have a balance of $2,000 on one card, your credit utilization ratio is 20% (i.e., $2,000 / $10,000). However, if you close one of the cards, your credit limit drops to $5,000, and your credit utilization ratio jumps to 40% (i.e., $2,000 / $5,000). This is why it's important to keep your available credit in mind when managing your credit utilization ratio.

By understanding how your credit utilization ratio is calculated and why it's important, you can take steps to keep your ratio low and maintain a healthy credit score.

Credit Utilization Ratio and Credit Scores

According to FICO, one of the most commonly used credit scoring models, credit utilization accounts for 30% of the calculation of your credit score. This means that if you have a high credit utilization ratio, it can significantly lower your credit score. In fact, FICO reports that individuals with the highest credit scores have an average credit utilization ratio of just 4%.

A study conducted by credit reporting agency Experian found that individuals with credit scores of 800 or above had an average credit utilization ratio of just 6%. In contrast, individuals with credit scores of 579 or below had an average credit utilization ratio of 77%.

Another study conducted by Credit Karma found that individuals with credit scores of 800 or above had an average credit utilization ratio of just 7%, while individuals with credit scores of 600 or below had an average credit utilization ratio of 53%.

These statistics demonstrate the significant impact that credit utilization ratio can have on credit scores. Maintaining a low credit utilization ratio can help to improve your credit score and make it easier for you to obtain credit in the future.

The Dos of Credit Utilization Ratios

Maintaining a healthy credit utilization ratio is crucial for a healthy credit score. Here are some dos that can help you keep your credit utilization ratio low and maintain a healthy credit score:

1. Keep a low balance-to-limit ratio

The lower your balance-to-limit ratio, the better your credit utilization ratio will be. To maintain a low ratio, try to keep your balances low and pay off your credit card balances in full each month.

2. Make multiple payments throughout the month

Making multiple payments throughout the month can help you keep your balance low and your credit utilization ratio in check. Consider making payments every week or two weeks to keep your balance low.

3. Ask for a credit limit increase

Asking for a credit limit increase can increase your available credit and help keep your credit utilization ratio low. Keep in mind that a credit limit increase may result in a hard inquiry on your credit report, which can temporarily lower your credit score.

4. Monitor credit card statements for errors

Regularly reviewing your credit card statements can help you catch any errors that could impact your credit utilization ratio. If you notice any discrepancies or errors, contact your credit card company to have them corrected.

5. Consider opening a new credit card

Opening a new credit card can increase your available credit and lower your credit utilization ratio. Keep in mind that opening a new credit card can also result in a hard inquiry on your credit report.

The Don'ts of Credit Utilization Ratios

Maintaining a healthy credit utilization ratio is key to keeping your credit score healthy. Here are some don'ts that can help you avoid mistakes that could negatively impact your credit utilization ratio:

1. Don't close credit cards with balances

Closing a credit card with a balance can negatively impact your credit utilization ratio, as it decreases your available credit. Instead, focus on paying off the balance or transferring it to a card with a lower interest rate.

2. Don't apply for multiple credit cards at once

Applying for multiple credit cards at once can result in multiple hard inquiries on your credit report, which can negatively impact your credit score. Plus, having too many credit cards can make it harder to keep track of your balances and payments.

3. Don't max out credit cards

Maxing out your credit cards can have a negative impact on your credit utilization ratio and your credit score. Instead, try to keep your balances low and pay them off in full each month.

4. Don't ignore credit card statements and due dates

Ignoring credit card statements and due dates can result in missed payments, late fees, and a negative impact on your credit score. Make sure to review your statements regularly and make payments on time to keep your credit utilization ratio in check.

5. Don't make big purchases right before applying for credit

Making big purchases before applying for credit can increase your credit utilization ratio and negatively impact your credit score. If you're planning to apply for credit, try to keep your balances low in the months leading up to your application.

Section 4: Tips for Maintaining a Healthy Credit Utilization Ratio

Maintaining a healthy credit utilization ratio is essential for a healthy credit score. Here are some tips for keeping your credit utilization ratio low:

1. Make payments on time

Making payments on time is essential for maintaining a healthy credit utilization ratio. Late payments can negatively impact your credit score and increase your credit utilization ratio.

2. Pay off balances in full each month

Paying off your balances in full each month can help keep your credit utilization ratio low and show lenders that you're responsible with credit.

3. Keep track of your balances

Keeping track of your credit card balances can help you avoid carrying high balances and keep your credit utilization ratio low.

4. Keep your credit card balances low

Keeping your credit card balances low can help you maintain a low credit utilization ratio and a healthy credit score. Aim to keep your balances below 30% of your available credit.

5. Increase your credit limit

Increasing your credit limit can increase your available credit and help keep your credit utilization ratio low. Consider asking your credit card issuer for a credit limit increase.

6. Use multiple credit cards

Using multiple credit cards can help you spread out your purchases and keep your credit utilization ratio low. Just be sure to keep track of your balances on each card.

7. Monitor your credit utilization ratio

Regularly monitoring your credit utilization ratio can help you catch any issues and make adjustments as needed.

By following these tips, you can maintain a low credit utilization ratio and a healthy credit score. Remember, your credit utilization ratio is just one piece of the puzzle when it comes to a healthy credit score, but it can have a big impact.

Conclusion

Maintaining a healthy credit utilization ratio is crucial for a healthy credit score. By keeping your credit utilization ratio low, you show lenders that you're responsible with credit and can be trusted with larger amounts of credit in the future. While it may take some effort to maintain a low credit utilization ratio, it's worth the effort in the long run.

Remember to regularly monitor your credit utilization ratio and make adjustments as needed. By following the dos and avoiding the don'ts, you can keep your credit utilization ratio low and maintain a healthy credit score. Additionally, by following the tips for maintaining a healthy credit utilization ratio, you can keep your credit score in good standing and potentially qualify for better credit offers and rates.

If you're struggling to maintain a healthy credit utilization ratio or have other credit concerns, don't hesitate to seek professional advice from a credit repair expert or financial advisor. With the right guidance and tools, you can take control of your credit and achieve your financial goals.

FAQ 1: How often should I check my credit utilization ratio?

It's a good idea to check your credit utilization ratio regularly to ensure that it's in good standing. While there's no set timeframe for how often you should check it, aim to check it at least once every three months. You can check your credit utilization ratio for free through your credit card issuer, credit monitoring services, or through credit reporting agencies.

FAQ 2: Can paying off my balances in full each month hurt my credit utilization ratio?

No, paying off your balances in full each month will not hurt your credit utilization ratio. In fact, it can help keep your credit utilization ratio low and improve your credit score. Aim to pay off your credit card balances in full each month if possible.

FAQ 3: What is the impact of opening a new credit card on my credit utilization ratio?

Opening a new credit card can impact your credit utilization ratio in two ways. First, it can increase your available credit, which can lower your credit utilization ratio. However, it can also result in a hard inquiry on your credit report, which can temporarily lower your credit score. Additionally, opening a new credit card can impact the average age of your credit accounts, which can also impact your credit score.

FAQ 4: Can I still have a good credit score with a high credit utilization ratio?

It's possible to have a good credit score with a high credit utilization ratio, but it can be more challenging. Aim to keep your credit utilization ratio below 30% to achieve the best credit score possible. If your credit utilization ratio is high, consider making extra payments or increasing your credit limit to bring it down.

FAQ 5: What is the best way to improve my credit utilization ratio quickly?

The best way to improve your credit utilization ratio quickly is to pay down your credit card balances. If you can't pay them off in full, make extra payments to bring them down. You can also ask for a credit limit increase, which can increase your available credit and lower your credit utilization ratio. Just be sure not to use the increase as an excuse to spend more.

About the Author:

Darrin Singer Jr is a seasoned financial advisor and credit repair expert with over 10 years of experience in the industry. He has helped hundreds of clients improve their credit scores and achieve their financial goals by providing them with practical tips, strategies, and tools to manage their credit effectively.

Darrin is passionate about educating people on the importance of maintaining a healthy credit score and using credit responsibly. He believes that with the right guidance and resources, anyone can take control of their credit and achieve financial freedom.

When he's not helping clients improve their credit, Darrin enjoys reading and staying up to date on the latest trends in the financial industry.