Credit utilization represents an important factor in your credit health. The less available credit you use, the better your credit score. In fact, credit utilization accounts for around 30% of your overall credit score. This figure is important because it gives credit companies insight on how much of your available credit you are using. If you regularly hit or exceed your credit limit, you are more likely to have difficulty repaying that money. Thus, if your credit utilization is high, you are considered to be a higher credit risk in the eyes of lenders. So, how can you calculate credit utilization, anyway?
Here is how credit utilization is calculated
Your credit utilization is how much of your available credit you use at any given time.
- Find your current balance and credit limit on your credit card billing statement.
- Divide your current credit card balance by your credit limit.
- Multiply the result by 100.
Credit Utilization Ratio = (Total balances on all credit cards/Total of credit limit on all cards) X 100
Here is an example of your credit utilization
You can calculate your credit utilization on a per-card basis or in its entirety. Let's say your credit balance is $500 and your credit limit is $1,000. You would divide $500 by $1,000 to get .50. Multiply the result (.50) by 100 to get 50%. That is how you calculate your per-card credit utilization. If you want to calculate your overall credit utilization, begin by adding the balances of each credit card. Add the credit limits of each credit card. Then divide the total balance by the total credit limit and multiply by 100.
Per-card vs. overall credit utilization
Since there are two ways to calculate your credit utilization, we owe you an explanation. Credit scores account for both measures of credit utilization. If you try to prevent the effects of high credit card balances by opening new cards with $0 balances, the card with a high balance could still hurt your score. This is why it is important to keep your credit utilization under 30% for each card and overall.
Your credit score is an important factor in your financial health. Credit utilization plays a significant role in determining your credit score. Excessive spending on your credit cards will lower your score because you will present an increased risk to lenders. You do not need to carry a credit card balance to show activity and improve your score; simply using your card regularly will do the trick. Experts recommend keeping your credit utilization low – no more than 30% on any particular card.
Now that you can calculate your credit utilization – and know the importance of it – it is time to monitor your balances and tame your credit utilization once and for all!