Credit Utilization Ratio – How Credit Utilization Ratio Impacts Borrowers

Credit utilization ratio, also known as credit utilization rate is the amount of revolving credit you are presently using divided by the total amount of revolving credit you have available.

The credit utilization ratio is generally expressed as a percent, and you can calculate an overall credit utilization ratio and a rate for each of your credit accounts (known as your per-card ratio).

Credit Utilization Ratio

Why Credit Utilization Ratio?

The credit utilization ratio is quite important because. Credit scoring models often consider your credit utilization rate when calculating a credit score for you. They can also impact up to 30% of a credit score. Based on the scoring model that is being used.

A low credit utilization ratio implies that you are using less of your available credit. Credit scoring models on the other hand. Generally, interpret this as an indication that you are doing quite a good job. Of managing credit by not overspending, and keeping your spending in. Check can also help you reach higher credit scores. With higher credit scores, it will be easier to secure. Additional credit like auto loans, mortgages, and credit cards with favorable terms, when you need it.

What is a Good Credit Utilization Ratio?

With a FICO Score or score by VantageScore, it is commonly advised that you keep your total credit utilization. Rate below 30%. The utilization ratio is seen as an indicator that you are doing a good job of managing. Your credit responsibilities since you are far from overspending. A higher utilization ratio, on the other hand, could be a sign of potential. Lenders or creditors that you are having issues with managing your finances.

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How Credit Utilization Ratio Impacts Borrowers

A borrower’s credit utilization ratio varies over time as. Borrowers make purchases as well as payments. The total outstanding balance due on a revolving credit account is reported to. Credit agencies at various times throughout the month.

Understand that, some lenders report to credit reporting agencies at the time a statement is issued to a borrower. While others may decide to report on a designated day of each month. Thus, the time used by lenders for reporting credit balances to an agency. Can impact a borrower’s credit utilization levels. As a result of this, borrowers who are seeking to. Decrease their credit utilization must have patience as well as expect that it. May take two to three credit statement cycles for credit utilization levels to. Actually, decrease when debt is being paid down.

Calculating Credit Utilization

Since your credit utilization is a simple ratio. You can easily estimate your own credit utilization, by simply knowing you.  Credit card limits and credit card balances. This information can be gotten. When you check your most current credit card statement, as you log into your online account. Or by calling the toll-free customer service phone number. Inscribed on the back of your credit card, to gain access to a live representative.

You can calculate credit utilization. By dividing a credit card’s balance by the credit limit. The result you will get will be a decimal. Then multiply that number by 100 to get a percentage. The result you will get is your credit utilization. Which is expressed as a percentage.

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How to Lower Your Utilization

You can lower your high credit utilization. And it will reflect on your credit report and in your credit score, the next time your credit card. Issuer reports your balance information.

There are two ways you can use in lowering your credit utilization:

You can reduce your credit utilization rate, by reducing your credit card balances. What this means is that you should simply pay as much as you can toward your credit card to lower your balance as well as your credit utilization quickly. Note, however, that your credit card issuer may not report your balance until the end of your billing cycle, thus you are to leave your balance low until then, to ensure that it pops up on your credit report.

Secondly, you can lower your credit utilization by having your credit card issuer, increase your credit limit. Note that this may not be easy, because it actually depends on your income, credit history, as well as how much time has elapsed since your last credit limit increase.

If you also happen to open a new credit card, it can also lower overall credit utilization, if you leave most of the credit available on the new card. However, note that the new card will do a hard pull on your credit and that could impact on your score.

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