With the high cost of homes, cars and everyday items nowadays, it is not unusual for Americans to use credit cards or personal lines of credit. If you rely too heavily on credit, though, you may be unable to make monthly minimum payments. Your credit score may also plummet.
While it can be difficult to determine how much credit you should use, identifying your credit utilization ratio may give you a good idea of your financial health. If your credit utilization ratio is too high, you may need to explore your debt relief options.
How do you calculate your credit utilization ratio?
To determine your credit utilization ratio, you simply compare how much credit you are currently using to how much you have available. For example, if you have a credit card with a $5,000 limit, a revolving balance of $2,500 would give you a credit utilization ratio of 50%?
You should probably know both your per-card credit and your overall credit utilization ratio. To calculate the latter, simply add together all your revolving balances and divide by your total available credit.
What is a good credit utilization ratio?
According to Experian, a major credit reporting bureau, an ideal credit utilization ratio is under 30%. While lenders consider a variety of factors when processing mortgages and loans, a credit utilization ratio above 30% may make it difficult to obtain financing for a home, car, or other major purchases.
If you find your credit utilization ratio is too high, you can diligently pay off your credit cards and personal lines of credit. Seeking bankruptcy protection may also be useful, as you may be able to eliminate some of your outstanding debts.