Your credit utilization ratio is a calculation based on the amount of revolving credit you have used versus the amount of revolving credit you have in total. Find out what your ideal credit utilization ratio should be and why.
The Ideal Ratio
Your credit utilization ratio should be below 50%. Ideally, it should be approximately 30% or lower.
Why not higher? A higher credit utilization ratio comes with certain difficulties: high debt loads, less available credit and a lower credit score.
High Debt Load
With a high ratio, you’ll have larger credit balances to pay down. The larger those balances are, the more difficult they will be to pay down in a reasonable timeframe. You may only be able to keep up with the minimum payments, which will help you avoid accumulating late fees but can’t stop the balance from accruing interest. As time goes on, this will be more challenging to repay.
Less Available Credit
A high credit utilization ratio will mean that you have less available credit to rely on. If your account balances reach their very limits, you will have no credit left. Your accounts will be maxed out.
Credit is an extremely useful financial tool, especially in emergencies! If you don’t have enough savings to cover an emergency expense, you can use a credit card. As long as your credit card has enough available credit on it, you can charge the expense to it and pay down the balance later on.
Another effective credit solution in an emergency would be a line of credit. With an approved line of credit loan, you can request a withdrawal within your limit and use the borrowed funds to pay for the emergency expense.
If you don’t have a line of credit already, you don’t have to make an appointment at your bank branch. You can apply for one online. One of the many benefits of choosing online loans in Arizona through CreditFresh is that the application process is quick and straightforward. It will take a few minutes to fill out your application. Soon after, you’ll find out whether you are approved or not.
Lower Credit Score
Your credit utilization ratio is one of the factors used to calculate your consumer credit score. Too much credit utilization will negatively impact your score.
Your credit score is a general assessment of your credit experience. It shows lenders that you can manage your credit accounts by making consistent bill payments on time. A high ratio increases your risk of defaulting on payments and makes you look like a risky borrower to lenders.
What About a 0% Credit Utilization Ratio?
While a low credit utilization ratio is good, you don’t want it to be as low as 0%. A 0% credit utilization ratio would mean that you don’t have any outstanding balances on your revolving credit accounts. You’re not using the accounts at all.
While a 0% ratio will make it easy to tackle debt repayments (since you will have none), it isn’t as advantageous when it comes to your credit score. If you have no credit payments to pay down, you can’t prove that you’re a responsible credit user. So, your score will inevitably suffer.
Is your credit utilization too high right now? Then, it’s time to buckle down on repayments and bring it down.