Credit can be a great thing to have. Credit allows you the opportunity to make large purchases, like a house or a car. It also allows you to apply for and get approved for credit cards with decent credit card balances. However, credit can be a dangerous thing if your credit score is not up to par. Bad credit is worse than no credit at all. In fact, bad credit can make lenders decide not to lend you any money, reject you from getting new credit cards or loans, and could even prevent you from finding good employment. One ratio that affects your credit score is the credit utilization ratio. This ratio is a seemingly difficult calculation, but is very crucial in determining your credit score rating. Keep reading for more information on the credit utilization ratio and some informational keys to a good credit score.
Let’s Break It Down
Understanding the credit utilization ratio is the first key to a good credit score. The credit utilization ratio is the quotient of the total amount of your credit card balance and your credit card total limits. Below is a quick calculation to help you better understand how to calculate credit utilization ratio:
You have $10,000 credit limit.
Your outstanding total on your card is $4,000.
$4,000 / $10,000 = .40 or 40%
Your credit utilization ratio will be 40%.
So, how does this percentage play a role in your credit score? This important percentage plays a huge role in determining your credit score. In fact, it is recommended to not allow your credit utilization ratio to exceed 30%. In the case of the above calculation, a 40% credit utilization ratio may result in a bad credit rating. Maintaining a low credit utilization ratio means that you are opened to receiving more lines of credit if you need it.
A Deeper Look
In relation to your credit score, another key to a good credit score is to understand the functions of the credit utilization ratio. This ratio gives you more available credit, which in turn helps to build your credit score. Although it may seem more sensible to have limited available credit, having the most available credit makes lenders more able to give you more lines of credit. In other words, your credit score looks more pleasing to lenders. In an effort to keep a great credit utilization ratio, it is recommended to make sure that your credit utilization ratio does not go over 30%.
Increase Your Credit Score
Now that you have calculated your credit utilization ratio, another key to a good credit score is getting your ratio to a level that will heighten your credit score. Below is some advice that will be very helpful when wanting to get your credit utilization ratio at a decent and low percentage. Knowing these tips will aid you in knowing the keys to a good credit score.
- Spend less money—this tactic may seem difficult, but is indeed very easy. All you have to do is only spend money when it is completely necessary. And when you have to spend the money, consider ways to not spend as much.
- Increase available credit—ever heard the saying that less is more? This can also be applied to your lines of credit. It is recommended to only use one credit card at a time and keep up with the payments. This way, your credit availability increases and your credit remains in good standing.
- Close credit cards when necessary—closing credit cards could result in a good credit score rating, but if it increases your credit utilization ratio, it will hurt your credit score instead. Before you decide to close, consider your ratio first.
- Monitor all parts of your credit score—your credit utilization ratio is not the only number to consider. Monitor your credit history, age of credit debt, and all other factors that play a role in your credit score.
Other Controllers of Your Credit Score
Yes, you are responsible for your finances and your credit. However, another key to a good credit score is keeping in mind that although you are responsible for your credit score, the primary controllers of your credit score are your debtors. These are the people and companies that have allowed you the ability to borrow their money or use their credit cards to make purchases. Your credit score is the primary guideline to rather or not these lenders want you to borrow money from them. If you have a good history of repayment, a good credit utilization ratio, and only a few lenders already on your credit report, then lenders will easily let you borrow money from them.
When it comes to your credit score, it is important to stay in good standing. Your credit score is almost as important as your social security number. It can open a lot of doors for you right now and in the future. Remember that your credit utilization ratio is a key factor to a good credit score, one that you must strive to keep at a decent percentage to stay in good credit standings.