The credit utilization ratio is simply the credit you are using in comparison to how much credit you actually have available, i.e. your credit limit.
So, if you have a credit card with a $10,000 limit and have used up $2,500 from it, your resulting credit utilization ratio is 25%.
Credit Utilization and Credit Score
It is imperative that you keep your credit utilization ratio blow 30% at all times. This is applicable to individual credit cards, as well as the collective credit limit that you enjoy. The credit utilization ratio counts for about one-third of your over all FICO score. Therefore, carrying a high amount of balance, i.e. more than 30% of your available credit limit, is highly damaging to your credit score.
While paying your credit card bill on time matters most, the amount of balance you are carrying around also heavily influences your credit. If mishandled together, or separately, both can haunt your credit report for a very long time!
The good news is that your credit utilization ratio is updated every time a credit report is generated. So once you pay off your credit card balance, the new data will be used to calculate your credit score and your credit report will be updated.
A Quick Guide to Lowering Your Credit Utilization Ratio
So if you are confident that you will be able to pay off the entire credit card balance in a month, then no problem. In fact, shop away. But you are here and that means there have been some credit issues in your past!
Fixing the credit utilization ratio is an important part of effective credit repair strategies. Your goal is to keep your overall credit utilization ratio at its lowest possible or at least lower than 30%, as stated above. Here are a few do-it-yourself credit repair tips for ensuring that your credit utilization ratio remains in control:
- Always keep a check on your credit card balances. If these have managed to creep higher than 30% of your available credit limit, it’s time to hit the brakes on spending.
- Spreading your balance over several cards will keep the credit utilization ratio low for the time being, but you aren’t fooling anyone! The underwriter will be worried about constant charging of various credit cards. So keep the spending to a minimum until you deal with the credit utilization.
- And finally, signing up for retail credit cards can mess up your credit utilization ratio in a big way. These have very low credit limits that can be reached in a single shopping spree, so stay away from them.
Lenders and loan underwriters give your credit utilization ratio just as much importance as your credit score. So get both in order if you are looking to borrow in the near future. Simply paying off your debt and credit balances is the best possible way you can achieve optimum levels of both.
Are you ready to fix your credit the DIY way? Here at QuickCreditRepair, we can help!