What Is a Good Credit Utilization Ratio?

Having a lower credit utilization ratio can make it easier for you to qualify for loans and credit cards. If your ratio is too high, you should work to improve it. Here's what you should know about your credit utilization ratio.

Credit utilization ratio definition

Also known as a credit utilization rate, a credit utilization ratio represents the amount of credit you’re currently using divided by the amount of credit you have available. It applies to all types of revolving credit accounts, such as credit cards and personal lines of credit. 

In most cases, your credit utilization ratio is expressed as a percentage.

What is a good credit utilization ratio?

The lower your credit utilization ratio, the better. A lower ratio shows you’re responsible with credit and don’t overspend. FICO and VantageScore credit scoring models recommend that you keep your credit utilization ratio at 30% or lower. 

So, if your total credit limit is $5,000, your total revolving balance should be no more than $1,500.

How to calculate your credit utilization ratio

To calculate your credit utilization ratio, follow these steps:

• Add up the balances on your revolving lines of credit. These can include your credit cards, personal loans, and home equity lines of credit.
• Add up the credit limits on your revolving lines of credit.
• Divide the total balance by your total credit limit.
• Multiply by 100 to convert your credit utilization ratio into a percentage.

How to improve your credit utilization ratio

If your credit utilization ratio is too high, lowering it can improve your chances of being approved for loans or credit cards.

Pay down debt

The ideal way you can reduce your credit utilization ratio is by paying off your balances. If possible, try to get your balance to $0. You’ll enjoy a better ratio and save some money on interest.

Request a higher credit limit

Contact your credit card companies or lenders to ask for a limit increase on your accounts. Just be sure to avoid spending the extra money, or you’ll boost rather than lower your ratio.

Open a new credit account

Adding a new credit card is an easy way to lower your credit utilization ratio. Plus, you can enjoy sign-up bonuses and other perks, like cash back and travel points.

Leave old accounts open

Closing a credit card account will lower the amount of your available credit and in turn, take a toll on your credit utilization ratio. That’s why it’s wise to keep old accounts open whenever you can.

Benefits of lowering your credit utilization ratio

It takes time and effort to lower your credit utilization ratio, but it’s sure to pay off. By reducing your ratio, you’ll boost your credit score and open the doors to better credit cards and loans in the future. You’ll find it easier to meet various financial goals, like buying a house or car. 

>RELATED: How does credit utilization affect my credit score?

Bottom line

Your credit utilization ratio shows how much credit you’re currently using. It’s a good idea to keep it to no more than 30%. If you don’t have a good credit utilization ratio and need fast funds, not to worry. 

Advance America offers a variety of loans for borrowers with most credit scores, including payday loans, installment loans, title loans, and lines of credit. Visit Advance America to learn more about the loans we offer and fill out your application today.