Credit is a complicated topic. Credit reports and credit scores are well-known by consumers. However, credit usage ratio is not. This is an important factor the credit bureaus use to determine a person’s score. So what is credit usage ratio? This credit usage ratio explained video will position your finances in a much healthier place than without understanding it.
Credit Usage Ratio Explained
Credit usage ratio, also known as credit utilization ratio, is the amount of your available credit limit that you are using at any given time. This ratio shows the creditors and the credit bureaus know how dependent you are on your credit accounts. For instance, if you have a $100 credit limit and you use $50 of it, than you have a credit usage ratio of 50%.
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Credit Score & Credit Usage Ratio Explained
The higher your ratio is, the risky you appear. Creditors may not extend you a larger limit. However, they could have the same reaction if you use very little or none of your available limit. It’s all about finding the right ratio that gives you the most favorable conditions and the best credit score.
Keep in mind that this is not the only piece of information that the bureaus will use to calculate your credit score. Payment history, amount owed, length of credit history, new credit and types of credit in use are among the items used to calculate your credit score.
What Is a Good Credit Usage Ratio?
A good credit usage ratio is less than 50%, but a a better number is around 30% or less. It’s good to use a healthy amount of credit. This creates a positive and responsible track record that future creditors can review. Rather than drowning in debt or living beyond your means, using a smaller amount of credit is fine. If you can’t pay off the bill each month, than this indicates you are living beyond your income and ability to manage your credit usage ratio.
For more information on credit and money management, schedule a free credit counseling session with us today.