What is a Credit Utilization Ratio?

In my article about what a credit score is, I talked about the factors that affect a credit score. Most of them are pretty straight forward. However, the second-most-important factor, your Credit Utilization Ratio (CUR), is a little trickier because it’s all about percents.

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I can feel all you math-phobes out there starting to sweat, but just hear me out.

Your Credit Utilization Ratio is the relationship between what you can borrow and what you actually borrow. This is represented by the percent of your available credit you’re using at any one moment.

Example

For example, say you have a credit card with a credit limit of $1,000. That means your available credit is $1,000.

Lucky you, you have a date! You go out and end up paying for dinner for both you and your date, and charge $50 to your card.

To find out what percent of your available credit this is, follow this formula:

(part÷whole) × 100 = %

In this case $50 is our part, $1,000 is our whole. Divide them, and we get 0.05. Multiplying by 100 gives us 5, which is our percent. So, you have used 5% of your available credit.

By the way, you’ll need that formula on the SAT, so you might as well memorize it. 

To keep your credit score looking rosy, you want to use 30% or less of your available credit. What is that for our imaginary credit card? Back to the formula!

This time, we’ll plug in numbers for the percent and whole, but we need to find the part.

(part÷1000) × 100 = 30

Using those awesome algebra skills I know you have, you can divide each side of our equation by 100, then multiply each side by 1000 to find that $300 is the most you should spend on your credit card before you pay it off.

Important Notes

  • Just because you can spend up to $300 in our scenario doesn’t mean you should. That’s just the max. Keeping your spending less than that creates an even better Credit Utilization Ratio.
  • Most credit cards and banks report what you owe to the credit bureaus once or twice a month, so if you do have to charge more than $300, it may not affect your score if you pay at least some of it off before it gets reported to the bureaus.
  • Every new line of credit you open increases the amount of available credit you have. Closing those accounts decreases that available credit. Both of these events affect how much you can spend and still stay within the ideal CUR range.
  • If you get offered a larger credit limit, don’t let it convince you to spend a ton more money simply because you’ll be able to. Remember, you still have to pay off the whole amount before the end of the month.

Now you know what a Credit Utilization Ratio is, use that knowledge to give yourself incentive to curb your spending urges. Your credit score and future self will thank you.

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