Fortunately, we can maintain a low credit utilization by keeping a credit card balance below 30% of our credit limit. For example, if the credit limit is $1,000 and the balance is $300, then the credit utilization for that credit card is 30%. To calculate the ratio, simply divide the credit card balance by the credit limit and then multiply by 100. A lower credit utilization ratio influences a better credit rating.
It’s important to note that the amount of credit, the credit limit, isn’t as important in this calculation. A credit card limit of $500 with a $250 balance is no different than a credit card limit of $10,000 with a $5,000 balance. In either case the credit utilization ratio is 50% or 20% above the recommended balance. One of the most important factors in improving a credit score is to keep the total charges below 30% of the total available credit limit.
Having a good credit rating is important, and overlooking it can be detrimental to your financial health. It can save you thousands of dollars in interest charges. For example, consider borrowing money to buy a $200,000 home with a 30-year mortgage. If you qualified for a rate of 4% with a good credit score, the interest would be over $143,000. However, if you received a higher rate of 4.5% due to a lower score, the interest would be over $165,000, costing you $22,000 more. Your monthly payments would also be higher.
When you have a solid credit profile, you get better financial deals and opportunities. It is worth the effort to maintain a good credit history.
UNDERSTANDING CREDIT UTILIZATION RATIO
