The proportion of a borrower's total available balance on all of its revolving accounts is known as the credit utilization ratio. Credit reporting companies consider the credit ratio to calculate a borrower's credit score.

A borrower's credit score might rise by reducing their utilization ratio. Closing a credit card is something you should avoid doing if you want to increase your credit score. A low utilization ratio is better for your credit use rate instead of a closed credit card.

How does the Credit Utilization Ratio Work?

The revolving credit of a borrower is often the main focus of the credit usage ratio. This ratio is a metric that shows how much of a borrower's total debt they are using in relation to the total amount of revolving credit balance that credit issuers have approved. Your existing debt-to-income (DI) ratio should be known while managing credit card amounts. When completing a credit application, the credit utilization ratio contemplates both the revolving ratios and non-revolving credit ratios.

Revolving credit ratio (which rises and falls) is common, but it's best always to keep it under 30%.

How is Credit Utilization Ratio Calculated?

You can calculate your credit usage ratio easily. It merely requires a short amount of time and some simple arithmetic.

Your recent billing statement of credit card is required. You can call the customer care line on your credit card or sign in to online account to know about your credit card limit and current balance.

A recent revolving credit report might also be helpful because it would have all your bank account information at one location. Furthermore, the info in credit card report—which may differ from your current bank account balance—is used to calculate the credit utilization percentage that goes into your credit score.

You can find credit ratio limit and the current balance on your credit card's most recent account statement. If the limit of your credit card isn't stated, you can call the customer service line for your credit card at the number given on the back side of your card to inquire. When a credit card doesn't have a predetermined credit limit ratio, the credit card company may disclose your biggest amount ever charged instead of credit limits.

Nevertheless, there are many credit limit calculators available online. You can frequently get credit utilization ratio if you subscribe for credit updates on weekly or monthly basis.

Follow these four steps to determine credit utilization rate:

1. Add up the balances on all of your revolving credit.
2. Add together all of credits limit ratios.
3. Divide Step 1's total revolving credit debt by Step 1's overall credit limit (from Step 2).
4. For a percentage representation of your credit use, multiply the number from Step 3 by 100.

Credit Utilization Calculation Example

An example of credit usage ratio calculation is shown below. Take the example of a borrower with three credit cards having various revolving credit account limits.

Card 1: A $10,000 credit line with a $2,000 balance

Card 2: Balance of $ 3,500 with a $15,000 credit line.

Card 3: Balance of $5,000 and 9,000 credit line.

All the cards combined have a revolving credit limit of $34,000 ($10,000 + $15,000 + $9,000). The credit used totals $10,500 ($2,000 + $3,500 + $5,000). Therefore, divide $10,500 by $34,000, or 30.8%, representing the credit use ratio.

How does Credit Utilization Impact Borrowers?

As borrowers make payments and purchases, their credit utilization ratio would change. At various points during the month, credit reporting bureaus get information about the total balance you owe on your revolving balance account.

Credit utilization rates of borrowers can be affected by the time period lenders take to report credit account balances to a bureau. Since credit levels might take credit card statement cycles ranging between two to three to decline when your debt is being liquidated. Borrowers who want to reduce their credit utilization should be patient and expect this to happen.

What is a Good Credit ratio?

One of the all credit measuring bureaus, Experian, states that the best credit ratio should be under 30%. Hence, if your credit card limit is $15,000, your account balance should be at most $4,500.

How to lower your credit utilization ratio?

Reduce your debt or raise the amount of your revolving credit to lower credit utilization ratio. You can increase the breathing room for your credit utilization and raise your credit score by applying for a new credit card or more credit limit. A balance transfer card can lower your utilization ratio by providing additional available credit if you're having difficulties paying off your bill. It can also help you avoid paying interest while you liquidate your balance.

How to improve Credit Utilization Ratio?

Pay your debts till they are at least 30% or less if you wish to increase your credit utilization. Other options include getting a new credit card, requesting a larger credit limit, or keeping a card with its debt fully paid but not being used. Nevertheless, the greatest way to increase your credit usage is to make on-time debt payments.