What is a Credit Utilization Ratio

Understanding Credit Utilization

Like it or not, using credit has become an everyday part of our lives. Whether you are paying for your car by monthly installments, or charging the latest iPhone to your credit card, it is all done using credit. However, the amount of credit you have access to, and the premium you pay for using it, can vary massively between individuals.

There are likely to be, of course, be several reasons for this, but one of the least understood is likely to be your credit utilization ratio. In fact, not only do very few people know what a credit utilization ratio is, but most people do not know that it even exists at all.

So, what is a credit utilization ratio?

In a nutshell, your credit utilization ratio is a rating of how much of your available credit you are using. This might seem complicated, but it can be explained most effectively using this simple example:

You have a credit card with an available credit limit of $1000, and your current balance is $750. In this case, your credit utilization ratio would be 75%. If your balance was $250it would be 25%.

Why is this important?

After all, if you have a limit of $1000 – why not use it – surely credit card companies love this as you are paying more interest on a higher balance? While all of this could be seen a correct, it is not always the case. Your credit utilization ratio affects how lenders see you when it comes to increasing your access to lending and the interest rates you’ll pay for future borrowing – so it is important to keep it at an optimum rate.

Consolidating debt through OneMain Financial could potentially be a way to control your monthly debt payments and possibly even help improve your credit utilization ratio. Debt consolidation may lower your interest rate or monthly payment, but be sure to consider origination fees and the length of repayment–which can offset the savings or even increase the total you pay over the life of the loan.

What is the optimum credit utilization ratio?

Well, obviously, this is a matter of some debate, but experts seem to agree on a figure of below 30% of your available credit across all of your retail lending, including any credit or store cards. Anything higher can affect which financial products you might have access to, with the situation getting worse as you approach the figure of 100%.By the same token, never really using your cards at all (i.e. having a credit utilization ratio of 0%) is not good either, because if you have no borrowing, you have no track record of paying it back either.

To wrap things up

Keeping a good credit score is essential when looking for good deals to finance small, large, and emergency purchases. While this might seem like a chore, simple actions like keeping your credit utilization ratio at less than 30% and paying your balance off regularly can help. Of course, this should not massively affect your rating on its own, but it can be an excellent starting point in taking back control of your finances.

Article written by admin

By Profession, he is an SEO Expert. From heart, he is a Fitness Freak. He writes on Health and Fitness at MyBeautyGym. He also likes to write about latest trends on various Categories at TrendsBuzzer. Follow Trendsbuzzer on Facebook, Twitter and Google+.