The Importance of Maintaining a Low Credit Utilization Ratio

By Britt Erica Tunick

While paying bills on time and keeping current on credit card payments are major factors in determining your credit score, they are only part of the equation. When it comes to your credit worthiness and the score that lenders use to determine whether or not they are willing to lend and what interest rate they will give you, the three main credit bureaus place just as much importance on your credit utilization ratio – 30 percent to be exact.

Just as its name suggests, your credit utilization ratio is the percentage of revolving credit you have that you are actually using at any given time. Loans such as mortgages or auto loans do not factor into this number. If, for example, you have three credit cards with a combined limit of $20,000 between them, and are carrying a balance of $10,000 on those cards, your credit utilization ratio is 50 percent.

Lenders look at this number as an indication of whether you are good at managing your spending, and anything above a 30 percent credit utilization ratio is likely to have a negative impact on your overall credit score. And, unfortunately, if you pay your balances in full each month doesn’t factor into the equation.

If you are someone who tends to charge everything, leaving you with a high credit utilization ratio, there are steps you can take to keep this from impacting your credit score. One solution is to simply reach out to your credit card companies and ask for a higher credit limit, thereby lowering the overall portion of credit that you are actually using. But, if you don’t like the idea of having more credit, another solution is to make mid-month payments on your credit cards instead of waiting for your bills to arrive. Doing this will lower the overall amount you owe before issuers report this number to the three main credit agencies and will keep it from impacting your overall score.