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Do you know your credit utilization ratio?

On Behalf of | Jan 11, 2021 | Firm News

While credit cards offer an easy way to pay for large purchases, too much credit card debt may keep you awake at night. If you regularly reach for your credit cards, you are far from alone. In fact, nearly 120 million adults in the U.S. have revolving balances on their cards. 

Carrying too much credit card debt may cause your credit score to plummet. You may also struggle to make minimum payments. Calculating your credit utilization ratio is an effective way to know whether you should explore some type of debt relief, such as a bankruptcy filing. 

What is a credit utilization ratio?

Your credit utilization ratio compares how much revolving credit you use to how much is available. To find your credit utilization ratio, you simply divide your outstanding balance by the limit on your credit card and express the quotient as a percentage. 

For example, if you have $3,000 in credit card debt and a $6,000 credit limit, your credit utilization ratio is 50%. When you are calculating your credit utilization ratio, do not forget to consider all your credit cards and credit limits. 

What is a good credit utilization ratio?

There is no steadfast rule you may consult to determine if you have a good credit utilization ratio. Still, many financial advisors recommend keeping the ratio below 30%. With a higher ratio, you may have difficulty securing financing or maintaining a decent credit score. 

You may also have some notions about what constitutes a manageable credit utilization ratio. If your credit cards are part of your rainy-day strategy, too little space between your revolving credit and your credit limit may make covering unexpected or emergency expenses nearly impossible.